Goldman Sachs Says Concerns Over U.K. Bond Scarcity Are Overdone

  • BOE’s expanded QE plan won’t make ‘big dent’ in market: RBC
  • Ten-, 30-year gilt yields fall to records amid Brexit response

Concerns that the Bank of England will fail to find enough bonds to satisfy its rebooted quantitative-easing program are overdone, according to Goldman Sachs Group Inc. and Royal Bank of Canada.

Gilts have rallied this week, with 10- and 30-year yields sliding to records, after the Bank of England failed on Tuesday to attract enough sellers of longer-term government securities to meet its purchase goal. Yields briefly bounced back on Wednesday after a successful buying operation -- part of an expanded BOE effort to shield the economy from the fallout of Brexit.

Yet concerns that the U.K. central bank is bumping up against Japan-like limits in its sovereign-bond purchases persist, particularly since Tuesday’s shortfall was the first since QE started in 2009. Such worries ignore the prospect of more government-debt issuance, as well as the sheer size of the gilt market, Goldman Sachs analyst Francesco Garzarelli wrote in a client note.

“The pool of long-dated gilts which the BOE can tap into is large,” London-based Garzarelli wrote. “An increase in government-bond issuance resulting from a looser fiscal policy in coming quarters should mitigate the scarcity effects even further.”

Easy Money

Like bonds across the developed world, gilts have been supported by years of easy money, while the BOE’s reaction to the decision to quit the European Union has supercharged a rally that’s made U.K. government debt the best performer in the developed world this year.

Gilts have handed investors 18 percent in 2016, the most among its peers, according to Bloomberg World Bond Indexes. The 10-year U.K. debt yield tumbled to a record 0.51 percent on Thursday, while 30-year yields reached an all-time low of 1.185 percent.

The BOE announced at its policy meeting on Aug. 4 that it would increase its gilt-purchase program by 60 billion pounds ($78 billion) to 435 billion pounds, with the additional purchases starting this Monday.

More issuance may be on the way to replace the purchases. Chancellor of the Exchequer Philip Hammond has signaled that additional borrowing is in the cards, saying last month he was ready to “reset” fiscal policy.

“The BOE’s 60 billion pounds of gilt-buying will, as was the case in the previous rounds, almost certainly not make a big dent in the total amount of bonds available to the market going forward,” London-based RBC analysts Cathal Kennedy and Peter Schaffrik wrote in a note. “The actual scarcity, compared to the euro market, is likely to remain limited.”

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