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Return on UK government bonds turns negative Return on UK government bonds turns negative
(35 minutes later)
The return on some UK government debt turned negative after the Bank of England missed its target in a new bond buying operation.The return on some UK government debt turned negative after the Bank of England missed its target in a new bond buying operation.
The Bank had offered to buy government bonds, or gilts, as part of its new quantitative easing (QE) programme to stimulate the economy.The Bank had offered to buy government bonds, or gilts, as part of its new quantitative easing (QE) programme to stimulate the economy.
But the bank fell £52m short of its £1.17bn target when it failed to find enough buyers.But the bank fell £52m short of its £1.17bn target when it failed to find enough buyers.
That has driven up prices and pushed down the return to investors, or yield.That has driven up prices and pushed down the return to investors, or yield.
As bond prices rise, yields fall, and vice versa.As bond prices rise, yields fall, and vice versa.
On Wednesday morning gilts maturing in 2019 and 2020 were yielding -0.1%.On Wednesday morning gilts maturing in 2019 and 2020 were yielding -0.1%.
New QE Surprise move
The Bank of England has been buying gilts at auctions in the market since 2009 in its QE programme to push money out into the banking system, to be lent onwards to businesses and individuals.The Bank of England has been buying gilts at auctions in the market since 2009 in its QE programme to push money out into the banking system, to be lent onwards to businesses and individuals.
It announced a new £60bn round of government bond buying last week.It announced a new £60bn round of government bond buying last week.
This is the first time it hasn't been able to buy as many gilts as it planned. This is the first time it has not been able to buy as many gilts as it planned.
Part of the programme will also involve buying up a limited amount of corporate bonds, fixed interest debt issued by companies.Part of the programme will also involve buying up a limited amount of corporate bonds, fixed interest debt issued by companies.
Sources close to the Bank say the market was taken by surprise by this new auction which was announced only last week, and many of the big pension funds which hold these ultra-safe investments, had not got their plans in place. Sources close to the Bank say the market was taken by surprise by this new auction, which was announced only last week, and many of the big pension funds that hold these ultra-safe investments had not got their plans in place.
They added that the market was also suffering from thin holiday trading with many of the important people who decide on the plans are on holiday They added that the market was also suffering from thin summer trading, with many of the important people who decide on the plans on holiday.
The Bank is expected to roll over the £52m it failed to buy this month to another auction later in the year.The Bank is expected to roll over the £52m it failed to buy this month to another auction later in the year.
The Bank's failure has had a similar effect on other bond markets with German bund yields falling sharply.The Bank's failure has had a similar effect on other bond markets with German bund yields falling sharply.
Commerzbank rates strategist Michael Leister said: "Yesterday's QE auction in Britain serves as a reminder that there is a scarcity of bonds out there for these central bank programmes and that's why we've seen a reaction in gilts, Treasuries and Bunds."Commerzbank rates strategist Michael Leister said: "Yesterday's QE auction in Britain serves as a reminder that there is a scarcity of bonds out there for these central bank programmes and that's why we've seen a reaction in gilts, Treasuries and Bunds."
Pension impact
The price and yield on gilts have a huge effect on individuals and governments.
For governments, low yields make it easy for them to borrow cheaply.
But for individuals, especially those seeking a retirement income, low yields mean low returns on their savings.
People retiring have traditionally bought an annuity - a financial product that promises a guaranteed income for life. Companies that sell annuities need to keep buying gilts to back that liability. The lower the yield on gilts, the less they can offer to the holder of the annuity.
As for final-salary pension schemes - which offer a set level of income - they also need to buy safe long-term investments to pay scheme members. But the lower gilt yields go, the less income they have to meet the costs of the scheme.