Carney May Limit BOE’s Bond Purchases, Pimco Says
The Bank of England’s new governor Mark Carney may shift the central bank’s policy away from bond purchases, removing one of the supports of the gilt market, according to Pacific Investment Management Co.
Carney, who will replace Mervyn King in July, has preferred to use a policy of signaling future rate decisions in his role at the Bank of Canada, said Michael Amey, a portfolio manager at Pimco in London. U.K. gilts have outperformed Canada’s bonds this year as the Bank of England extended asset purchases, a policy known as quantitative easing.
Carney has “been more keen on forward guidance on interest rates rather than pure QE, and we know that Governor King has not been particularly keen on forward guidance,” Amey said in an interview on Bloomberg Television’s “On The Move” with Francine Lacqua. “That’s something that we’ll be looking at.”
Carney, a 47-year-old former Goldman Sachs Group Inc. managing director, will become the first foreigner to run the 318-year-old institution as it absorbs new powers to oversee banks. BOE policy makers have used record-low interest rates and asset buying to help the U.K. economy recover from its first double-dip recession since the 1970s.
Carney told reporters last month the need to raise interest rates in Canada is “less imminent” after stating since April that the strength of the nation’s economy might require borrowing costs to be increased.
Gilts returned 2.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Canadian government debt gained 2.3 percent and U.S. Treasuries earned 2.5 percent.
The Bank of England increased its bond-buying target from 275 billion pounds ($441 billion) at the end of last year to a total of 375 billion pounds of purchases completed this month.
Bank of England policy makers voted 8-1 to stop expanding bond purchases this month as the majority said uncertainty among consumers and companies may be affecting the impact of the program on the economy.
“Potentially the risk for gilts is that once the market starts to form more of an opinion about what Carney could do with the job, we reach the conclusion there is less emphasis on QE and more emphasis on communication and forward guidance,” said Sam Hill, an interest-rate strategist at Royal Bank of Canada in London.
The yield on 10-year gilts rose one basis point, or 0.01 percentage point, to 1.85 percent as of 3:59 p.m. in London.
The impact on the currency and bond markets may not be clear until Carney’s approval hearings, Steven Barrow, head of Group-of-10 research at Standard Bank Plc in London said.
“I wouldn’t have thought as far as sterling is concerned that we’ll see a significant directional move before we hear what he has to say,” Barrow said. “He may be very cautious and hold his cards close to his chest.”
Carney’s appointment doesn’t mean the Bank of England will abandon its asset purchases, Pimco’s Amey said. He favors U.S. Treasuries over gilts due to the Federal Reserve’s plan to buy mortgage-backed securities.
Fed Chairman Ben S. Bernanke unveiled a program in September to buy $40 billion of mortgage debt a month in a third round of quantitative easing.
“We’re not enormously keen on gilts,” Amey said. “The Fed is still in the game so to speak on QE, the Bank is pausing, so we would prefer that market. I still think we’ll see more QE but I also think we’ll see more forward guidance.”
To contact the reporter on this story: Lucy Meakin in London at firstname.lastname@example.org.