Just a week following the announcement to expand its QE programme with a £70bn purchase of long-dated government bonds, the Bank of England (BoE) faced its first challenges of the second day of operation, with institutional investors unwilling to sell long-dated bonds to the Central Bank.
According to a statement released by the BoE today, it only managed to raise £1.17bn of bonds, representing a £52m shortfall, which the bank aims to recover over the next six months. The statement also revealed that the Bank of England was only able to raise the bonds at a price significantly exceeding the market rate.
Similar to other QE programmes, the BoE programme is aimed at pushing down bond yields, in an attempt to encourage investors to opt for riskier asset classes, whilst reducing borrowing costs for individuals and businesses. However, while yields have indeed fallen to record lows, with even bonds with 20-year maturity reporting negative yields, investors appeared reluctant to sell.
Pension funds are reluctant to sell long-dated bonds out of concerns of further funding shortfalls. A recent stress test conducted by European Pension Regulator Eiopa in January 2016 revealed that the UK’s pension fund’s, which account for the largest proportion of defined benefit schemes in Europe, have some of the weakest funding positions, their funding deficit could jump from €218bn to €343bn, according to Eiopa.
Darren Bustin, head of Derivatives at Royal London Asset Management comments on the shortfall: “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.”