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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) | |
| 1.37pm BST | |
| 13:37 | |
| Here’s a pithy explanation of what’s gone wrong with the Bank of England’s quantitative easing stimulus programme, from Danny Vassiliades, Principal at pensions consultants Punter Southall: | |
| Updated | |
| at 1.40pm BST | |
| 1.01pm BST | 1.01pm BST |
| 13:01 | 13:01 |
| 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. | 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. | But even so, the hitch means the BoE faces paying higher prices for gilts. |
| Mihir Kapadia, CEO and Founder of Sun Global Investments, explains: | 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. | 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.” | “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.” |
| 12.51pm BST | 12.51pm BST |
| 12:51 | 12:51 |
| This is what record low interest rates and money-printing QE schemes leads to... | 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%. | 48% of Eurozone government bonds now trade with a negative yield. A whopping 86% is yielding below 1%. |
| 12.32pm BST | 12.32pm BST |
| 12:32 | 12:32 |
| 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%. |
| 12.01pm BST | 12.01pm BST |
| 12:01 | 12:01 |
| 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 businesses | 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 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. |
| Updated | Updated |
| at 12.01pm BST | at 12.01pm BST |
| 11.05am BST | 11.05am BST |
| 11:05 | 11:05 |
| Pension funds fear more pain from QE | Pension 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/yv7FKLocPk | This 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. |
| 10.49am BST | 10.49am BST |
| 10:49 | 10:49 |
| 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. |
| Updated | Updated |
| at 10.50am BST | at 10.50am BST |
| 10.25am BST | 10.25am BST |
| 10:25 | 10:25 |
| 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%. |
| 10.16am BST | 10.16am BST |
| 10:16 | 10:16 |
| 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." #gilts | Aberdeen 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/VVON8yCcf4 | The @bankofengland’s “response” to that uncovered QE auction yday: it’ll just buy some more gilts another day https://t.co/VVON8yCcf4 |
| 10.01am BST | 10.01am BST |
| 10:01 | 10:01 |
| Royal London: UK may need VAT cut if QE fails | Royal 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.” |