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UK gilt yields hit record lows after Bank of England bond-buying failure – business live UK gilt yields hit record lows after Bank of England bond-buying failure – business live
(35 minutes later)
1.01pm BST
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Some City experts believe yesterday’s QE failure was partly due to the summer lull, as many bond vigilantes have fled their desks and gone on holiday.
But even so, the hitch means the BoE faces paying higher prices for gilts.
Mihir Kapadia, CEO and Founder of Sun Global Investments, explains:
Buyers were perhaps more reluctant to sell than the BoE estimated, but this may just reflect the fact that many traders, fund managers and other decision makers are on holiday.
“Although the news has come as a surprise to investors, it is much too early and too simplistic to say the BoE’s plan to mitigate the impact of Brexit was unsuccessful. The BoE will try again in a series of planned regular purchases and may well be able to buy in the required amounts. However, it is clear that the move has had some market impact and the purchases are likely to be at higher prices than anticipated.”
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This is what record low interest rates and money-printing QE schemes leads to...
48% of Eurozone government bonds now trade with a negative yield. A whopping 86% is yielding below 1%.
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The yield on Britain’s five-year bonds has also hit a new all-time low this morning, touching just 0.123%.The yield on Britain’s five-year bonds has also hit a new all-time low this morning, touching just 0.123%.
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Duncan Weldon, head of research at the Resolution Group, has also blogged about the Bank of England’s QE problems.Duncan Weldon, head of research at the Resolution Group, has also blogged about the Bank of England’s QE problems.
He explains why the Bank couldn’t buy enough gilts yesterday:He explains why the Bank couldn’t buy enough gilts yesterday:
Whilst ten year gilt yields hovering around 0.5% may be historically low — they are still high compared to what’s on offer in much of the rest of the developed world. There’s a substantial premium in that 0.5% compared to Japan, Switzerland, Germany, France or the Netherlands.Whilst ten year gilt yields hovering around 0.5% may be historically low — they are still high compared to what’s on offer in much of the rest of the developed world. There’s a substantial premium in that 0.5% compared to Japan, Switzerland, Germany, France or the Netherlands.
In other words, insurance companies & pension funds may be reluctant to sell longer dated gilts, overseas investors may be more reluctant to sell than in 2009 and the Bank (clearly) can’t buy gilts from itself. In effect the available market of gilts the Bank faces is much smaller. Hence hitting a snag on day two.In other words, insurance companies & pension funds may be reluctant to sell longer dated gilts, overseas investors may be more reluctant to sell than in 2009 and the Bank (clearly) can’t buy gilts from itself. In effect the available market of gilts the Bank faces is much smaller. Hence hitting a snag on day two.
Duncan also has three good suggestions to improve Britain’s response to the Brexit vote:Duncan also has three good suggestions to improve Britain’s response to the Brexit vote:
1) The BoE should buy more short-dated bonds. This would push down borrowing costs over the next couple of years, giving more immediate help to households and businesses1) The BoE should buy more short-dated bonds. This would push down borrowing costs over the next couple of years, giving more immediate help to households and businesses
2) The government should spend more, financed by higher borrowing. Record low gilt yields means borrowing has never been cheaper, after all.2) The government should spend more, financed by higher borrowing. Record low gilt yields means borrowing has never been cheaper, after all.
3) A new “British Investment Bank” should be created. It would drive loans to small businesses, and to fund infrastructure projects -- with the Bank of England allowed to buy bonds issued by the BIB.3) A new “British Investment Bank” should be created. It would drive loans to small businesses, and to fund infrastructure projects -- with the Bank of England allowed to buy bonds issued by the BIB.
Post: Making QE more effective - https://t.co/5ZGbjuN4TT - on yesterday's snag and the next steps the Bank could take.Post: Making QE more effective - https://t.co/5ZGbjuN4TT - on yesterday's snag and the next steps the Bank could take.
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Pension funds fear more pain from QEPension funds fear more pain from QE
The recent slump in UK gilt yields is dire news for pension funds, whose deficits are steadily worsening.The recent slump in UK gilt yields is dire news for pension funds, whose deficits are steadily worsening.
With government bonds offering such meagre returns, fund managers must expect even lower rates of return in the years ahead.With government bonds offering such meagre returns, fund managers must expect even lower rates of return in the years ahead.
That’s why the Bank of England struggled to buy enough bonds yesterday -- pensions are clinging onto the gilts they already own, as they’re generating a higher income than stuff they could buy today.That’s why the Bank of England struggled to buy enough bonds yesterday -- pensions are clinging onto the gilts they already own, as they’re generating a higher income than stuff they could buy today.
This pretty much sums up why the BoE QE operation failed pic.twitter.com/yv7FKLocPkThis pretty much sums up why the BoE QE operation failed pic.twitter.com/yv7FKLocPk
Patrick Bloomfield, Partner at financial consultancy Hymans Robertson, explains:Patrick Bloomfield, Partner at financial consultancy Hymans Robertson, explains:
The combined deficit of UK defined benefit (DB) pension schemes has hit £950bn for the first time ever. This is off the back of further drops in yields as the Bank of England attempts to roll out its package of Quantitative Easing. The BoE failed to buy the gilts it hoped to yesterday as investors seem to be unwilling to part with their longer-dated bonds. In light of that we could see the situation deteriorate further over the coming days.The combined deficit of UK defined benefit (DB) pension schemes has hit £950bn for the first time ever. This is off the back of further drops in yields as the Bank of England attempts to roll out its package of Quantitative Easing. The BoE failed to buy the gilts it hoped to yesterday as investors seem to be unwilling to part with their longer-dated bonds. In light of that we could see the situation deteriorate further over the coming days.
“It’s doesn’t come as a surprise that pension schemes are being hit hard, but the pain won’t be felt equally by all. The difference between those that had hedged and those that hadn’t will be marked. Many schemes with robust funding plans will be able to weather this. But some will be feeling the pain acutely, and there could be more to come.“It’s doesn’t come as a surprise that pension schemes are being hit hard, but the pain won’t be felt equally by all. The difference between those that had hedged and those that hadn’t will be marked. Many schemes with robust funding plans will be able to weather this. But some will be feeling the pain acutely, and there could be more to come.
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Markus Allenspach, head of fixed income research at Julius Baer, also believes the Bank of England may struggle to deliver its new QE programme.Markus Allenspach, head of fixed income research at Julius Baer, also believes the Bank of England may struggle to deliver its new QE programme.
Like Royal London, he also predicts that the Treasury may have to step in, if investors refuse to sell their gilts to the BoE.Like Royal London, he also predicts that the Treasury may have to step in, if investors refuse to sell their gilts to the BoE.
It should be kept in mind that UK pension funds and insurance companies are forced to match the duration of their assets with their liabilities, which are longer-term by nature. There is, so to say, an institutionalised demand for long-dated paper which could make it hard for the BoE to achieve its targets for Gilt purchases.It should be kept in mind that UK pension funds and insurance companies are forced to match the duration of their assets with their liabilities, which are longer-term by nature. There is, so to say, an institutionalised demand for long-dated paper which could make it hard for the BoE to achieve its targets for Gilt purchases.
In contrast to Germany, we sense a higher probability of a fiscal boost for the UK, which could limit the downside for Gilt yields in the medium term.In contrast to Germany, we sense a higher probability of a fiscal boost for the UK, which could limit the downside for Gilt yields in the medium term.
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Investors are piling into UK debt, after the Bank of England promised to make up the £50m shortfall in yesterday’s QE programme.Investors are piling into UK debt, after the Bank of England promised to make up the £50m shortfall in yesterday’s QE programme.
That is sending yields down to fresh record lows, as traders calculate that the BoE will pay ‘whatever it takes’ to get its hands on the gilts.That is sending yields down to fresh record lows, as traders calculate that the BoE will pay ‘whatever it takes’ to get its hands on the gilts.
So the 10 yr Gilt is now trading at a yield of .53%.So the 10 yr Gilt is now trading at a yield of .53%.
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More reaction to the Bank’s statement:More reaction to the Bank’s statement:
Aberdeen Asset Mgt: "The BoE’s statement today doesn’t amount to a hill of beans. That shortfall could grow." #giltsAberdeen Asset Mgt: "The BoE’s statement today doesn’t amount to a hill of beans. That shortfall could grow." #gilts
The @bankofengland’s “response” to that uncovered QE auction yday: it’ll just buy some more gilts another day https://t.co/VVON8yCcf4The @bankofengland’s “response” to that uncovered QE auction yday: it’ll just buy some more gilts another day https://t.co/VVON8yCcf4
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Royal London: UK may need VAT cut if QE failsRoyal London: UK may need VAT cut if QE fails
Yesterday’s bond-buying failure shows that the government cannot simply rely on monetary policy to protect the UK economy, says Darren Bustin, Head of Derivatives at Royal London Asset Management.Yesterday’s bond-buying failure shows that the government cannot simply rely on monetary policy to protect the UK economy, says Darren Bustin, Head of Derivatives at Royal London Asset Management.
Bustin argues that fiscal policy - government tax and spending - may have take more of the strain. That could include a cut to VAT.Bustin argues that fiscal policy - government tax and spending - may have take more of the strain. That could include a cut to VAT.
He also reckons that the Bank of England could suffer more failed auctions in the future.He also reckons that the Bank of England could suffer more failed auctions in the future.
Here’s Bustin’s full comment:Here’s Bustin’s full comment:
“The Bank of England fell £50m short in its gilt purchase target for yesterday, and even then only secured this much by paying well above market price for some of these gilts. Today’s announcement has the Bank kicking the can down the road and has created a ‘wait and see’ scenario for investors looking at reasons for the failure. As quantitive easing was meant to have been a solution for the problems facing the British economy following Brexit, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution.“The Bank of England fell £50m short in its gilt purchase target for yesterday, and even then only secured this much by paying well above market price for some of these gilts. Today’s announcement has the Bank kicking the can down the road and has created a ‘wait and see’ scenario for investors looking at reasons for the failure. As quantitive easing was meant to have been a solution for the problems facing the British economy following Brexit, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution.
“It should be noted that the DMO will issue long term gilts, maturing in 2055 next week which may mean investors will be more eager to sell other bonds to make room for this new supply, which could make up for yesterday’s shortfall. They could also continue to take advantage of the artificial demand QE has created to offer bonds at values well above the current market price. However, with plummeting government bond yields and pensions schemes desperate not to increase deficits further, we could well see more bond purchase failures, with low coverage ratios a likelihood for some time.“It should be noted that the DMO will issue long term gilts, maturing in 2055 next week which may mean investors will be more eager to sell other bonds to make room for this new supply, which could make up for yesterday’s shortfall. They could also continue to take advantage of the artificial demand QE has created to offer bonds at values well above the current market price. However, with plummeting government bond yields and pensions schemes desperate not to increase deficits further, we could well see more bond purchase failures, with low coverage ratios a likelihood for some time.
“Longer term, if quantitative easing continues to fail this could mean a fiscal response such as a VAT cut of 2.5% in the Autumn Statement as the Treasury steps in. This could help to curb inflation as the Bank of England is currently forecasting medium term inflation above its stated 2% target.”“Longer term, if quantitative easing continues to fail this could mean a fiscal response such as a VAT cut of 2.5% in the Autumn Statement as the Treasury steps in. This could help to curb inflation as the Bank of England is currently forecasting medium term inflation above its stated 2% target.”
9.56am BST9.56am BST
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BoE: Firms gloomy about Brexit voteBoE: Firms gloomy about Brexit vote
The Bank of England has also reported signs that Britain’s vote to leave the European Union vote is hitting the UK economy.The Bank of England has also reported signs that Britain’s vote to leave the European Union vote is hitting the UK economy.
Its latest Agents Report, just released, warns that many firms expect capital spending, hiring and turnover to suffer.Its latest Agents Report, just released, warns that many firms expect capital spending, hiring and turnover to suffer.
This backs up the concerns raised in last week’s August inflation report (when the Bank slashed interest rates and restarted its QE programme).This backs up the concerns raised in last week’s August inflation report (when the Bank slashed interest rates and restarted its QE programme).
Clearer signs of Brexit damage in July's BoE agents' report. Investment intentions much weaker in services sector: pic.twitter.com/ZCsvc2bzdlClearer signs of Brexit damage in July's BoE agents' report. Investment intentions much weaker in services sector: pic.twitter.com/ZCsvc2bzdl
It’s not ALL bad news, though - British manufacturers are expecting to benefit from Brexit. That may be due to the weaker pound, which ought to help exports.It’s not ALL bad news, though - British manufacturers are expecting to benefit from Brexit. That may be due to the weaker pound, which ought to help exports.
Manufacturers expect a positive boost from Brexit. Every other sector: not so much. Interesting from @bankofengland: pic.twitter.com/y7LNXzXQepManufacturers expect a positive boost from Brexit. Every other sector: not so much. Interesting from @bankofengland: pic.twitter.com/y7LNXzXQep
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BoE to buy more gilts today (it hopes...)BoE to buy more gilts today (it hopes...)
The Bank of England has also confirmed that it will press on with another reverse auction today, despite yesterday’s hitch.The Bank of England has also confirmed that it will press on with another reverse auction today, despite yesterday’s hitch.
It is planning to buy £1.17bn of shorter-dated UK gilts – bonds with maturities below 15 years – as part of its new £60bn QE programme.It is planning to buy £1.17bn of shorter-dated UK gilts – bonds with maturities below 15 years – as part of its new £60bn QE programme.
That assumes that City investors are prepared to sell their holdings in British government debt, though.....That assumes that City investors are prepared to sell their holdings in British government debt, though.....
That reverse auction takes place between 2.15pm and 2.45pm today, and we’ll all be watching to see if Mark Carney gets his hands on the gilts he wants.That reverse auction takes place between 2.15pm and 2.45pm today, and we’ll all be watching to see if Mark Carney gets his hands on the gilts he wants.
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Bank of England statement releasedBank of England statement released
Here we go! The Bank of England isn’t giving up on its bond-buying plan, despite yesterday’s hitch.Here we go! The Bank of England isn’t giving up on its bond-buying plan, despite yesterday’s hitch.
Instead, it is planning to press on, and buy an extra £52m of government debt over the next six months. That will make up for Tuesday’s embarrassing shortfall:Instead, it is planning to press on, and buy an extra £52m of government debt over the next six months. That will make up for Tuesday’s embarrassing shortfall:
In a brief statement, it says:In a brief statement, it says:
The Bank will incorporate the £52m shortfall from yesterday’s uncovered operation within the second half of the current six-month purchase programme.The Bank will incorporate the £52m shortfall from yesterday’s uncovered operation within the second half of the current six-month purchase programme.
As set out in the Market Notice of 4 August 2016, details of these purchases will be announced on 3 November 2016.As set out in the Market Notice of 4 August 2016, details of these purchases will be announced on 3 November 2016.
The statement is online here, along with more technical info for bond traders about today’s QE operation (buying short-dated gilts).The statement is online here, along with more technical info for bond traders about today’s QE operation (buying short-dated gilts).
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City investors and reporters are hammering the refresh key, looking for the Bank of England’s statement...City investors and reporters are hammering the refresh key, looking for the Bank of England’s statement...
9.04am - still nothing. Monetary policy is over. Its done. Forget it @bankofengland9.04am - still nothing. Monetary policy is over. Its done. Forget it @bankofengland
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Yikes....Yikes....
For the first time in history, we are seeing negative yields in the UK gilt curve. Two 19s and a 20 now trading with a negative yield.For the first time in history, we are seeing negative yields in the UK gilt curve. Two 19s and a 20 now trading with a negative yield.
(that means 19 and 20-year bonds - the kind of long-dated gilts which the Bank hopes to buy).(that means 19 and 20-year bonds - the kind of long-dated gilts which the Bank hopes to buy).
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Toby Nangle, global co-head of asset allocation at Columbia Threadneedle, isn’t panicking about yesterday’s bond-buying failure.Toby Nangle, global co-head of asset allocation at Columbia Threadneedle, isn’t panicking about yesterday’s bond-buying failure.
He reckons that the Bank of England won’t struggle to buy the bonds it needs, thanks to Mark Carney’s opposition to imposing negative interest rates in the UK.He reckons that the Bank of England won’t struggle to buy the bonds it needs, thanks to Mark Carney’s opposition to imposing negative interest rates in the UK.
That means the Bank will be very reluctant to pay more than the face value of any bond (which would mean a yield below zero).That means the Bank will be very reluctant to pay more than the face value of any bond (which would mean a yield below zero).
Next long gilt reverse auction will be *very* well covered. #TimeStampNext long gilt reverse auction will be *very* well covered. #TimeStamp
Reason why is Carney's fwd guidance: that rates won't fall -ve.Reason why is Carney's fwd guidance: that rates won't fall -ve.
I wouldn’t bet against Toby, frankly....I wouldn’t bet against Toby, frankly....
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UK borrowing costs have been falling steadily since the Bank of England announced its new £60bn bond-buying programme last week.UK borrowing costs have been falling steadily since the Bank of England announced its new £60bn bond-buying programme last week.
This nice chart from the Financial Times shows how 10-year gilt yields have hit record lows today:This nice chart from the Financial Times shows how 10-year gilt yields have hit record lows today:
It’s part of a wider trend, of course - many eurozone governments can borrow even cheaper, thanks to the European Central Bank’s stimulus programmes.It’s part of a wider trend, of course - many eurozone governments can borrow even cheaper, thanks to the European Central Bank’s stimulus programmes.
But as Bloomberg points out, the Brexit vote has accelerated the trend:But as Bloomberg points out, the Brexit vote has accelerated the trend:
UK bonds climb before #BOE comments on QE auction ‘shortfall’ https://t.co/ferOXBY4Gr via @anoojad pic.twitter.com/Z9lus3Ftu3UK bonds climb before #BOE comments on QE auction ‘shortfall’ https://t.co/ferOXBY4Gr via @anoojad pic.twitter.com/Z9lus3Ftu3
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Bank of England QE programme explainedBank of England QE programme explained
Economist Sean Richards has done a good explainer about the Bank of England’s quantitative easing programme.Economist Sean Richards has done a good explainer about the Bank of England’s quantitative easing programme.
He points out that the BoE was trying (and failing) to get its hands on government debt that doesn’t mature for at least 15 years.He points out that the BoE was trying (and failing) to get its hands on government debt that doesn’t mature for at least 15 years.
Tuesday’s purchases are particularly significant as they are the day that not only our children are committed to the consequences of QE but our grandchildren as well.Tuesday’s purchases are particularly significant as they are the day that not only our children are committed to the consequences of QE but our grandchildren as well.
The category “over 15 years” includes our longest-dated UK Gilt which matures in 2068 and as part of previous operations the Bank of England owns some £989 million of it.The category “over 15 years” includes our longest-dated UK Gilt which matures in 2068 and as part of previous operations the Bank of England owns some £989 million of it.
Sean also explains that record low gilt yields are good news for borrowers (but not, of course, for savers):Sean also explains that record low gilt yields are good news for borrowers (but not, of course, for savers):
Those who have the ability to remortgage might well be noting that the UK five-year Gilt yield is a mere 0.17% as that particular rate is used for the various derivatives used to set the rates for fixed-rate mortgages. So there could be a bonanza set of offers to come unless of course the banks suck the gains into their margins.Those who have the ability to remortgage might well be noting that the UK five-year Gilt yield is a mere 0.17% as that particular rate is used for the various derivatives used to set the rates for fixed-rate mortgages. So there could be a bonanza set of offers to come unless of course the banks suck the gains into their margins.
The new Bank of England QE program explained #BoE https://t.co/xnZ1HcYDPD via @notayesmanseconThe new Bank of England QE program explained #BoE https://t.co/xnZ1HcYDPD via @notayesmansecon
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UK borrowing costs hit record lowsUK borrowing costs hit record lows
Boom! The interest rate on UK government debt has fallen to fresh record lows, after the Bank of England’s bond-buying failure yesterday.Boom! The interest rate on UK government debt has fallen to fresh record lows, after the Bank of England’s bond-buying failure yesterday.
The yield on 10-year gilts has dropped to just 0.54%, down from 0.56% last night.The yield on 10-year gilts has dropped to just 0.54%, down from 0.56% last night.
And 30-year gilts are now yielding just 1.3% -- a remarkably cheap cost of borrowing for three decades.And 30-year gilts are now yielding just 1.3% -- a remarkably cheap cost of borrowing for three decades.
They can go lower...fresh records for UK10-yr, 30-yr bond yieldsThey can go lower...fresh records for UK10-yr, 30-yr bond yields
Yields move down when prices go up -- so this means that British government bonds are even more expensive than ever before.Yields move down when prices go up -- so this means that British government bonds are even more expensive than ever before.
So, traders are anticipating that the Bank of England must pay even higher prices in order to prise investors hands off their bonds....So, traders are anticipating that the Bank of England must pay even higher prices in order to prise investors hands off their bonds....
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The agenda: Bank of England's QE statementThe agenda: Bank of England's QE statement
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Protecting the UK economy from the risks of the Brexit vote is even harder than we expected.Protecting the UK economy from the risks of the Brexit vote is even harder than we expected.
Last night, the Bank of England admitted that its new plan to buy £60bn of government bonds had hit an unexpected snag -- City investors were refusing to sell up.Last night, the Bank of England admitted that its new plan to buy £60bn of government bonds had hit an unexpected snag -- City investors were refusing to sell up.
This quantitative easing scheme was a key part of the stimulus package which the BoE launched last week, alongside cutting interest rates to just 0.25%.This quantitative easing scheme was a key part of the stimulus package which the BoE launched last week, alongside cutting interest rates to just 0.25%.
The idea is to buy gilts (UK government bonds) from investors, to encourage them to buy riskier assets instead and help drive economic activity.The idea is to buy gilts (UK government bonds) from investors, to encourage them to buy riskier assets instead and help drive economic activity.
However, as we reported last night, gilt owners declined the Bank’s offer:However, as we reported last night, gilt owners declined the Bank’s offer:
The Bank offered on Tuesday to buy back £1.17bn of long-dated gilts – those with a maturity of 15 years or more – but received offers of only £1.11bn, leaving it with a shortfall of £52m. It is the first time since the Bank started buying back bonds that it has failed to attract enough sellers.The Bank offered on Tuesday to buy back £1.17bn of long-dated gilts – those with a maturity of 15 years or more – but received offers of only £1.11bn, leaving it with a shortfall of £52m. It is the first time since the Bank started buying back bonds that it has failed to attract enough sellers.
Jason Simpson, a UK rate strategist at French bank Société Générale, told Reuters: “It is a little surprising that this comes on the first week ... it is quite early in the whole process, which will be a worry for the Bank of England.”Jason Simpson, a UK rate strategist at French bank Société Générale, told Reuters: “It is a little surprising that this comes on the first week ... it is quite early in the whole process, which will be a worry for the Bank of England.”
Related: Bank's post-Brexit strategy hits snag as gilt buyback falls shortRelated: Bank's post-Brexit strategy hits snag as gilt buyback falls short
The Bank is planning to release a statement to the City at 9am, outlining its next move. It may have to offer even higher prices to persuade gilt owners to sell up.The Bank is planning to release a statement to the City at 9am, outlining its next move. It may have to offer even higher prices to persuade gilt owners to sell up.
#QE craziness! Even after a massive drop in UK #yields, investors won't sell their bonds to the #BoE pic.twitter.com/PrXpwK1ml4#QE craziness! Even after a massive drop in UK #yields, investors won't sell their bonds to the #BoE pic.twitter.com/PrXpwK1ml4
Very little else on the agenda, I’m afraid (it is August, after all), but something’s bound to turn up.Very little else on the agenda, I’m afraid (it is August, after all), but something’s bound to turn up.
Europe’s stock markets have opened slightly lower, with the FTSE 100 dropping back from yesterday’s 14-month high.Europe’s stock markets have opened slightly lower, with the FTSE 100 dropping back from yesterday’s 14-month high.
Our European opening calls:$FTSE 6837 down 14$DAX 10677 down 16$CAC 4450 down 18$IBEX 8633 down 32$MIB 16740 down 57Our European opening calls:$FTSE 6837 down 14$DAX 10677 down 16$CAC 4450 down 18$IBEX 8633 down 32$MIB 16740 down 57
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