Bank of England’s bond-buying will be uphill task, investors warn

THE Bank of England will keep struggling to find sellers to take part in its expanded bond-buying scheme to boost the UK economy, bond investors have warned, after the central bank stumbled on the second day of its new programme.

After falling short of its target on Tuesday, the Bank stressed that it enjoyed strong demand yesterday for its £1.17bn purchase of seven to 15-year government bonds, also known as gilts, with almost five times as many offers as it needed.

The auction was closely watched after Tuesday’s session of longer-term gilts came up £52m short of the Bank’s goal, as investors proved reluctant to part with their safe-haven bonds. This was the first time since the Bank began quantitative easing (QE) in 2009 that it failed to find enough sellers.

The Bank’s QE programme was ramped up last week alongside a cut in interest rates in an attempt to flush more cash into the economy. Threadneedle Street aims to buy £60bn in bonds over the next six months.

While the central bank said it would simply make up the £52m gap later in the year, participants in the bond market warned that the drought of sellers could worsen. The yield on 10-year gilts has slumped to near-record lows, signalling that the Bank would have to pay more to buy the assets.

“The BoE’s statement doesn’t amount to a hill of beans. They’re saying they’ll make up the shortfall, which is actually pretty small so far, over the next six months. But that shortfall could grow,” said Luke Hickmore, senior investment manager at Aberdeen Asset Management.

The long-dated gilts that the Bank hopes to buy are often owned by pension funds, which need these assets to match long-term liabilities to savers – and these liabilities grow as yields on investments fall.

“Lots of people are bidding us for bonds – Mark Carney’s now bidding me for bonds, and he still can’t have them,” Mr Hickmore told Bloomberg. “The problem is he was trying to buy 15-year-plus bonds today in the gilt market. That’s a really difficult area.”

Meanwhile, the Treasury is lining up a bond sale of gilts that won’t mature until 2055, which could prompt some investors to sell shorter-term bonds to make room for these new assets in their portfolio, according to Darren Bustin, head of derivatives at Royal London Asset Management. “However, with plummeting government bond yields and pensions schemes desperate not to increase deficits further, we could well see more bond purchase failures,” he said.