Graeme Wearden (until 3.10) and Nick Fletcher 

Bank of England shakes off QE wobble with successful £1.17bn bond buy –as it happened

UK central bank has bounced back from Tuesday’s QE failure, by successfully buying gilts from City investors today
  
  

The Bank of England in London, whose QE programme has hit an early snag
The Bank of England in London, whose QE programme has hit an early snag Photograph: Gareth Fuller/PA

European shares turn in mixed performance

Worries about the effects of central bank action to stimulate the economy - notably the Bank of England’s new QE programme - along with further weakness in the oil price combined to leave European markets flagging on a fairly quiet day of summer trading. German and French markets fell back, not helped by utility E.ON reporting disappointing results. But the FTSE 100 edged higher, helped by a strong performance from the insurance sector. However Tony Cross, market analyst at Trustnet Direct, cautioned:

London’s FTSE-100 may be... fractionally higher but it’s worth bearing in mind that the pound remains under pressure and the market is set to face something of a shock in the morning as a raft of heavyweight equities go ex-div in a move that is set to lop a hefty 37 points off the value of the index.

The final scores showed:

  • The FTSE 100 finished up 15.12 points or 0.22% at 6866.42
  • Germany’s Dax dipped 0.39% to 10,650.89
  • France’s Cac closed down 0.36% at 4452.01
  • Italy’s FTSE MIB fell 0.03% to 16,791.55
  • Spain’s Ibex ended down 0.08% at 8658.9
  • In Greece, the Athens market added 0.87% to 567.28

On Wall Street the Dow Jones Industrial Average is currently down 27 points or 0.15%.

Meanwhile Brent crude is down 1.47% at $44.32 following the US inventory figures, having earlier climbed as high as $45.68.

As for UK bonds, two year yields are marginally higher but five year, 10 year and 30 year yields are in negative territory.

On that note, it’s time to close for the evening. Thanks for your comments, and we’ll be back tomorrow.

Here’s our story on the Bank of England’s latest and more successful bond buying programme, courtesy of Jill Treanor and Larry Elliott:

The Bank of England has avoided further embarrassment over its gilt-buying programme by comfortably succeeding in finding investors willing to sell gilts for its post-Brexit economic recovery plan.

Threadneedle Street said it could have bought almost five times as many bonds as it needed on the third day of its latest round of quantitative easing (QE).

The ease with which the Bank managed to find sellers for bonds with a maturity of seven to 15 years on Wednesday was in stark contrast to its struggle to attract investors willing to part with bonds with a maturity of 15 years or more the day before.

When longer-dated bonds were sought on Tuesday, the Bank failed to attract the £1.17bn it was seeking.

Before news that the purchase of seven to 15-year stock was 4.71 times covered – meaning the Bank was offered nearly five times as many gilts as it was looking to buy – interest rates on bonds had fallen to record lows on concerns about the effectiveness of the Bank’s stimulus package.

The Bank said on Wednesday it would try to make up the £52m shortfall in future buybacks of longer-dated stock that helped push up the price of gilts, which in turn pushed down their yield, or interest rate.

Their full story is here:

Back with the Bank of England’s - mixed - bond buying programme over the last couple of days, here’s one of the UK gilts where the yield went into negative territory earlier, the first time this has happened since the day after the UK referendum:

Updated

On the surprise rise in US crude stocks, Joshua Mahony, market analyst at IG, said:

Crude prices took a tumble after a surprise increase in US crude inventories, marking the third consecutive week of rising stocks. This flies in the face of seasonal trends, which typically see inventories fall throughout US driving season, only to pick up again in the fourth quarter.

Amid reports of rising Saudi Arabian output, coupled with the expectation that US production will rise in 2017 to reflect increasing rig count, it is clear that unless OPEC pull something out the bag next month, we could see crude prices tumble once more.

US crude stocks in surprise weekly gain

Meanwhile a mixed picture from the latest US report on oil stocks has seen volatile movements in the crude price. Immediately following the update from the Energy Information Administration showing a bigger than expected fall in US gasoline stocks last week, Brent crude recovered from early losses to rise around 1.3% to $45.68.

But after further consideration, a surprise increase in crude oil inventories rather than the expected fall sent the price back into negative territory, with Brent down 0.33% at $44.83.

Earlier a new report from Opec forecast that world oil demand growth would remain at 1.15m barrels a day in 2017, unchanged from its previous prediction.

David Morrison

News of the day’s successful Bank of England bond buying has seen a recovery in the market, with two year and five year yields now in positive territory. But 10 year and 30 year yields are both still down, but better than they were.

Updated

Today's QE reverse auction in a success!

Newsflash! Today’s Bank of England QE operation has passed off without a hitch.

The BoE has successfully bought £1.17bn of UK gilts in today’s reverse auction. These bonds mature between 2023 and 2030.

Investors flocked to take advantage of the chance to sell these bonds to the Bank of England.

They offered £5.5bn worth of gilts to the Bank of England -- or 4.7 times as much as the central bank actually wanted to buy.

That’s a pretty solid result, especially after yesterday’s failed reverse auction of long-dated bonds.

Updated

On a lighter note, the Bank of England has taken one of its new plastic five pound notes up to Yorkshire, to pose with the pioneering steam locomotive of the industrial revolution.

Good luck, chaps....

A quick correction: UK bonds maturing in 2019 and 2020 have turned negative this morning, which means they are changing hands for more than their face value.

This BBC page has the details.

Bank of England launches another reverse auction...

Over at the Bank of England, the cry has gone up:

Once more unto the bond market, dear friends, once more.

OK, that’s probably not accurate. But the BoE has just launched another QE reverse auction, despite yesterday’s hitches.

Today the BoE is trying to persuade investors to sell bonds of between seven and 15-years maturity, rather than the longer-dated bonds which were targeted yesterday. It hopes to buy £1.17bn of gilts, injecting that money into the financial system to fight the risk of a Brexit slowdown.

The process runs for 30 minutes, from 2.15pm to 2.45pm. We should get the results shortly afterwards.

Updated

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:

  • The gilt market is reaching the point where existing QE has diminished the available supply of gilts from potential sellers
  • Gilt holders that are reluctant to sell include insurance companies and pension funds, that are either compelled to hold gilts by their reserving requirements or by guidance from the relevant regulator
  • This means speculators can buy bonds knowing that the Government will have to increase prices to buy them back under QE
  • This all leads to further gilt yield falls
  • We may be reaching the end of QE as a sustainable policy tool, unless the Bank of England expands its purchasing to assets it does not really want to hold, such as corporate bonds.
  • The gilt market is not functioning as an efficient market, as one huge buyer (the Bank of England) is having a big distorting effect on prices.

Updated

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.”

This is what record low interest rates and money-printing QE schemes leads to...

The yield on Britain’s five-year bonds has also hit a new all-time low this morning, touching just 0.123%.

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:

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.

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

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.

Updated

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.

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.

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.

“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.

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.

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.

Updated

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.

More reaction to the Bank’s statement:

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.

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.

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.

“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.”

BoE: 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.

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).

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.

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.

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 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.

Updated

Bank of England statement released

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:

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.

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).

Updated

City investors and reporters are hammering the refresh key, looking for the Bank of England’s statement...

Yikes....

CORRECTION: that’s debt maturing in 2019 and 2020....

Updated

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.

I wouldn’t bet against Toby, frankly....

Updated

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:

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:

Bank of England QE programme explained

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.

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.

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.

UK 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.

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.

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....

Updated

The 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.

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.

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.

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.

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.”

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.

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.

Updated

 

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