Higher price makes BoE’s bond purchase operation smoother

After a Bank of England’s (BoE) securities purchase auction failed to buy all the bonds it wanted to and failed short of £52 million, yields dropped sharply, and pushing bond prices higher. The central bank needs to purchase £60 billion worth of gilts in 16 weeks. Every day, it is purchasing around £1.17 billion worth of gilts. The trouble lies with the long-dated ones, especially with longer maturities of more than 15 years. Insurance and Pension funds are very reluctant to give away these higher coupon paying bonds to the central bank as they are already suffering from a high deficit and asset liability mismatch over a longer horizon.

This week a second attempt by the central bank to purchase long-dated bonds have gone smoothly largely due to the price surge. The BoE received offers from investors worth2.67 times the amount it wanted to buy.

However, the problem is likely to persist as according to bond analysts reluctance persists. Investors handed out bonds this week as a fresh supply of £1.25 billion was about to hit next day of the purchase. In the absence of adequate supply, there could be similar disruptions in the purchases ahead.