The Bank of England managed to purchase £1.17 billion of medium-dated UK government bonds on Wednesday, in a more successful reverse auction than the one conductedthe day before, when the bank was unable to persuade bond investors to part with their holdings in government debt.
Sellers offered £5.5 billion of government debt to the BOE, meaning that the cover ratio for the reverse auction was 4.71, a solid result, especially considering what happened on Tuesday.
That compares to a ratio of 2.15 times at the last reverse auction where the bank bought medium-dated debt — bonds with maturities between seven and 15 years.
On Tuesday, the Old Lady of Threadneedle Street attempted to buy £1.17 billion worth of debt as part of its new package of monetary stimulus, but could only buy £1.12 billion worth of gilts, more than £50 million below the target set. That was despite offering much higher than market rate.
The bank targeted UK pension funds and insurance companies to buy gilts, but struggled to fulfil its entire allocation of purchases. Tuesday’s shortfall was the first since the bank started buying government debt in 2009.
One of the big drivers of the lack of enthusiasm to sell by UK pension funds — which are among the largest holders of safe, steady UK government debt — was that funds need the return provided by long-dated gilts in order to pay out to those people invested in their funds. Without that long-term return, many pension funds would struggle to fulfil their commitments, and as such don’t want to part ways with their bonds.
British bond yields are plumbing record lows, with the benchmark 10-year gilt yielding just 0.54% as of 4:25 p.m. BST (11:25 a.m. ET). Here’s the chart:
The idea behind the BOE trying to buy new bonds is a fairly simple one in theory. The bank buys billions of pounds worth of gilts, which in turn pushes up the price of the bonds, and sends their yield lower (yield moves inversely to price). This then makes investors look elsewhere for assets that give a higher return.
The Bank of England cut interest rates to a historic low of just 0.25% on Thursday, and launched a £70 billion programme of quantitative easing, including an unprecedented £10 billion dedicated to buying investment grade bonds from companies with substantial UK operations.
The rate cut was widely expected, with markets pricing an almost 100% chance of the cut happening, but the extension of bond buying, while not massively shocking, was not as widely expected.