BOE fails to meet bonds-purchase target

The pound reached a one-month low as it appears that Bank of England’s (BOE) additional Quantitative Easing (QE) programme prevented sterling bulls from entering the markets.

The UK currency had succeeding decreases after the BOE announced new stimulus measures. It appeared that it stabilised after the immediate nosedive that followed the Brexit vote’s result but its latest downwards trend provides more evidence that there is slowdown of the British economy’s growth.

On Tuesday, the BOE failed to meet its target of bond purchases during its latest effort of monetary stimulus intended to offset the consequences of the UK’s decision to exit the European Union. The target was to buy £1.170 billion of long-term debt with maturity in excess of fifteen years, but has ended up buying only £1.118 billion. The Bank’s failure to buy as many bonds as it wanted exposed its limitations on QE purchases and also seeded doubts within the markets as to whether there is short supply of long-term UK government bonds.

BOE’s unsuccessful attempt urged a number of investors to hold on their bonds investments given that their yields are significantly better than cash investments, including institutional investors such as insurance companies and pension funds. Many investors now are focusing on maintaining their investment income stream in order to meet their future liabilities due to the existence of a huge amount of negative-yielding debt.

Within a statement by the BOE, it was said that it will look for the completion of the remaining £52 million worth of bond purchases during the second half of the 6-month asset purchase programme and that more details will follow on 03 November. The overall aim of the Bank is to purchase £60 billion worth of government bonds within six months as part of its attempt to stimulate the economy. Since the beginning of the BOE’s bond-purchasing programme back in 2009, this is the first time that there was a supply shortfall and hence this is why British gilt yields fell to record lows.

The GBP/USD was trading close to the 1.30 level on Wednesday while during the next two trading sessions it ended up with losses and fell to 1.29180, its lowest level since 11 July. On a weekly basis the cable fell by 1.2% and since the referendum result on 23 June it fell by an overall 13%.

Ten-year gilt yields on Friday fell to a record low of 0.52% as data on the same day revealed that the UK construction sector in June fell into recession for the first time in four years.

What needs to be asked now is whether the BOE’s failed bond purchase due to insufficient liquidity is a sign of further decrease of yields. It is also worth noting that future attempts to buy sizeable bond amounts from an illiquid market implies that they will have to pay higher prices only to try and reach their target.


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