The Bank of England’s plan is to keep calm and carry on buying.
The central bank said yesterday it will deal with a £52mn shortfall ($60.8mn) in an operation on Tuesday at a later date as it made no changes to its expanded £60bn quantitative-easing programme. Details of these purchases will be announced when the institution publishes information on the second half of the plan on November 3.
The statement came a day after the BoE failed to buy all the gilts it wanted at a reverse auction — the first such shortfall since it started QE in 2009 — as investors proved unwilling to part with their holdings of longer-dated bonds.
The miss may have been partly due to thin summer liquidity, or even traders being on holiday, which means Tuesday’s issue may be a one-off. The European Central Bank has previously front-loaded purchases under its own QE programme to avoid a shortage of available securities during the region’s holiday months.
While the BoE’s shortfall was small compared with the total intended programme, it may still be an early sign of the challenges the bank may face in expanding QE. The next auction will be held yesterday.
“If they were reasonably comfortable that this was just a one-off, then the natural thing to do would be to say ‘OK, fair enough, I’ll just buy some more today and then we will move on,’” Pacific Investment Management Co money manager Mike Amey said in a Bloomberg Television interview. “So I think it’s a bit more nuanced than that. And it indicates to us that it’s going to be a challenge to buy these bonds.”
The gilt purchases are part of a package of measures designed to combat the economic fallout of Britain’s decision to leave the European Union. The Brexit defence, announced by Governor Mark Carney last week, also included corporate-bond purchases and the first interest-rate cut in more than seven years.
At Tuesday’s operation, the central bank received offers to sell £1.118bn of gilts due in more than 15 years on Tuesday, compared with a target of £1.17bn.
UK government bonds rose yesterday, sending yields to record lows. The 10-year yield was down five basis points at 0.530% as of 12:15pm London time, while the 30-year gilt yield declined 10 basis points to 1.291%.
“Yields are already extremely low so people are worried about the efficacy of this policy, whether it can really have a bite,” Bloomberg Intelligence economist Dan Hanson said in an interview. The fact “they haven’t said we’ll make up the difference in the auction today might mean they’ve got concerns about liquidity in the market and they’re just going to push the can down the road a little bit and wait until November and reassess.”