The Bank of England (BOE) failed to purchase the number of government bonds it wanted from hesitant investors which resulted in the first deficit since the bank launched its quantitative easing (QE) program in 2009.
The development showed investors were not willing to give up their assets of longer-dated gilts. BOE officials said they needed the bonds to provide the national economy with additional stimulus under the latest £60 billion QE agenda.
Government bonds offer inadequate returns nowadays so fund managers are looking forward to lower yields in the next few years.
On Tuesday, the central bank tendered a proposal to buy back £1.17 billion worth of bonds with maturity of 15 years or more. However, they only got offers of £1.11 billion leading to a loss of £52 million. This is the first time that the BOE’s effort to re-purchase bonds did not entice the desired number of sellers.
The underperformance may have been caused to a certain extent by weak liquidity or traders going on holiday during summer. In the past, what the European Central Bank (ECB) did under its own easing program was to allocate purchases unevenly. This was meant to prevent shortfalls during the holidays. Even as the shortage was not big compared to the total program, it remains a possible indication that the BOE may face challenges in expanding quantitative easing.
Gilt buying is intended as one of the strategies to help the country withstand the economic repercussions of the UK’s decision to exit from the European Union. Last week, BOE Governor Mark Carney also announced corporate bond-buying and the first rate cut in over seven years.
Government bonds increased on Wednesday with the standard 10-year bond profit declining five basis points to 0.532 percent during morning trading in London. Earlier, they went down to a low of 0.529 percent. Meanwhile, the 30-year bond yield dropped nine points to a low of 1.30 percent.
The Bank of England already passed its electronic money-printing program which it introduced in March of 2009. It is one component of a stimulus package to set in motion the national economy through the purchase of gilts.
The other principal measure the bank will implement is a reduction in interest rates by one quarter point to 0.25 percent. Yet, these met some problems as high-street banks were not willing to pass on lower borrowing costs to clients.