BOE to See If Shorter-Dated Gilt Holders Are Reluctant Sellers

  • Central bank is buying from seven- to 15-year QE bucket
  • Cover ratio will drop from earlier reverse auctions: SocGen

On Tuesday, the Bank of England paid above the odds for long-dated gilts. Today comes a test of whether investors are similarly reluctant to part with shorter-dated government bonds.

Societe Generale SA says the central bank will indeed face challenges -- borne from money managers’ keenness to hang onto debt that gives any sort of return in a world of increasingly negative yields.

While the BOE has received sufficient orders in shorter-term gilt purchases in the past, this time the cover ratio -- an indication of how willing investors are to sell -- will decline, according to the French lender. The BOE is seeking to purchase 1.17 billion pounds ($1.6 billion) of securities in what’s known as the seven- to 15-year bucket of its rebooted quantitative-easing program. Offers will be in by noon London time, with the results out later this afternoon.

This “is the smallest of the three buckets,” SocGen analysts led by London-based head of fixed-income and foreign-exchange strategy Vincent Chaigneau wrote in a client note. “Covers have so far been decent,” but “they are expected to decline.”

Click here to read why overpaying isn’t necessarily bad for the BOE.

A weak supply calendar in coming weeks may be another factor discouraging bondholders from selling, according to Chaigneau.

Benchmark 10-year gilt yields rose two basis points, or 0.02 percentage point, to 0.56 percent as of 11:35 a.m. London time, compared with a record-low 0.501 percent on Aug. 15. The 2 percent bond due in September 2025 fell 0.175, or 1.75 pounds per 1,000-pound face amount, to 112.65.

U.K. bonds climbed on Tuesday after the BOE paid above market prices for 1.17 billion pounds of securities due in more than 15 years. The transaction drew offers of 1.54 times the amount sought, down from 2.67 times in an equivalent reverse auction a week earlier.

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