The activities of the Bank of England in the City’s gilts’ market tend to be for the initiated only. This week, though, they have become rather like archery or trap shooting: fascinating when the Olympics roll round.
So it was that the markets were agog on Wednesday to see whether Threadneedle Street would be able to attract enough sellers for the bonds it wanted to buy as part of its post-Brexit stimulus package.
The reason was simple. On Tuesday, the Bank could not find enough financial institutions willing to part with their gilts. It was the first time this had happened, calling into question the viability of the whole quantitative easing (QE) programme.
There was never any doubt that the Bank would succeed in finding willing sellers in its operations on Wednesday when it was buying bonds with a seven- to 15-year maturity. The problem the previous day was at the long end of the market, affecting gilts with a maturity of 15 years or more.
The big test will come next Tuesday when the Bank again seeks to buy these long-dated gilts. Broader misgivings about the QE programme have not been quelled.
Critics point to two issues. First, long-dated bonds are valuable to pension funds. They are thinking decades ahead and need long-term assets to match long-term liabilities. Their reluctance to sell long-dated bonds explains Tuesday’s embarrassment.
Threadneedle Street was always going to have less trouble buying short-dated bonds and there is an argument for concentrating its efforts in this sector of the market anyway. That is because a whole range of financial products, including mortgages and bank loans, are set using short-dated gilts as the benchmark. Buying this category of bonds will drive down interest rates and stimulate activity.
That is the theory. Low bond yields mean borrowing for companies is ultra-cheap. But there has been no investment bonanza. Firms have been borrowing, but only in order to finance share buy-back schemes.