Lack of sellers sparks trouble for BoE asset purchases

The Bank of England’s (BoE) newly enhanced asset purchase program that includes a £60 billion increase to the current asset purchase program and a fresh introduction of £10 billion corporate securities purchase program ran into trouble on the very second day of its operation.

The central bank tried to purchase £1.17 billion worth of long-dated government bonds but the auction failed to purchase that amount and ended up purchasing £1.12 billion. In spite of receiving prices significantly higher than the market levels investors rejected BoE’s offers to sell another 50 million to the bank. Though the amount seems pretty small compared to BoE’s total package it points to an acute problem in the market. Pension and insurance funds, which have large portfolio of long-dated gilts, are not ready to part with them, due to the reinvestment risks associated. Many of the Gilts in question offer much higher interest rates, which are unimaginable at the moment in the sovereign bond market.

Recent data suggested that the pension funds in the UK are already suffering severely largely due to the drop in yields. Their deficit has ballooned to record £408 billion after the UK Brexit referendum.

BoE officials are confident that future auctions will be covered in full and pointed out that the shortfall was small and that trading in markets is thin in August. A statement will be released at 9am on Wednesday morning in this regard.