Longer-Dated Gilts Pare Advance as BOE QE Attracts Large Offers

Updated on
  • BOE buys 1.17 billion pounds of bonds in reverse auction
  • Investors offer 4.14 times the amount of gilts purchased

Longer-dated U.K. government bonds pared an earlier advance as the Bank of England’s latest attempt to get investors to part with the securities in its quantitative-easing program met with more offers than at a previous operation.

The central bank bought 1.17 billion pounds ($1.57 billion) of bonds due in more than 15 years, with investors offering 4.14 times the amount of securities purchased, up from a ratio of 2.08 at an operation last week. Pension funds and insurers, who typically hold longer-dated assets to match liabilities, had thus far been reluctant sellers, also due to a lack of relatively safe alternatives with comparable yields. Tuesday’s operation saw the central bank buy the bonds with a small premium or even a discount.

The first reverse auction of these securities on Aug. 9 failed to attract enough sellers, and the central bank has often paid above-market prices to secure the bonds.

“This will be a disappointment to the market as it brings to a close the idea that pension funds are keen to hold onto their long gilts and therefore that the BOE will be forced to pay over market for them,” said Jason Simpson, a fixed-income strategist at Societe Generale SA in London. “Unsurprisingly the market has dropped back with longs giving back a lot of their morning gains.”

Yields Fall

Thirty-year gilt yields dropped three basis points, or 0.03 percentage point, to 1.30 percent as of 3:16 p.m. London, after falling as much as seven basis points. The 3.5 percent bond due in January 2045 rose 0.785, or 7.85 pounds per 1,000-pound face amount, to 152.095. The yield on benchmark 10-year gilts fell five basis points to 0.67 percent.

Demand for U.K. bonds surged before and after the June 23 referendum that resulted in the country deciding to exit the European Union, fueling concern that an economic slowdown and even recession would ensue. The BOE responded on Aug. 4 by cutting interest rates to a record and boosted its QE program’s target to 435 billion pounds.