BOE seeks to identify bond sellers in financial stability effort
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THE Bank of England (BOE) will start asking market makers to identify who is looking to sell gilts to its temporary bond-buying programe, a move that appears to be aimed at helping financial stability rather than speculators.
The BOE is studying patterns of demand, and will continue to set a maximum price it is willing to pay to ensure the “backstop objective of the tool is delivered”, it said in a market notice. The tweak to its rules comes just hours after the BOE slashed the amount of gilts it purchased on Monday (Oct 3), initiating a sell-off in long-maturity debt.
From Tuesday, the BOE is asking dealers to identify offers made on behalf of themselves or clients using unique identifiers, which it will also use for its future quantitative-tightening programme. The bond-buying tool was created to stem a crash in the gilt market amid a cascade of collateral calls from pension funds.
“I see no other explanation than concern the tool is not being used by its intended recipients,” said Antoine Bouvet, senior rates strategist at ING Groep. “It doesn’t say that they will refuse offers from other market participants, although we might realistically expect that if no pension fund is using it in the run-up to Oct. 14 then the programme won’t be extended.”
The BOE first stepped in to prop up the market last Wednesday, following a rout triggered by the government’s fiscal plans. Since then, it has purchased just over £3.6 billion (S$5.9 billion) of long-dated debt across four operations, a fraction of its potential £20 billion maximum. That suggests the total size of the plan will fall considerable short of the £65 billion it committed last week until Oct 14.
The BOE is sending a “clear signal that this is a financial stability operation, and they are not in the business of keeping gilt yields low for the sake of it”, said Rupert Harrison, a portfolio manager at BlackRock Inc and former adviser to a previous UK chancellor George Osborne. “The Bank is doing enough to stop pension schemes blowing up, but not so much that it looks like it’s printing money to fund government borrowing.”
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On Monday, purchases reached a new low as the BOE bought only £22.1 million of just a single bond and rejected about £1.9 billion of bids. That abruptly reversed market gains, with 30-year yields ending six basis points up at 3.89 per cent, after earlier falling 20 basis points.
“It seems as though the Bank of England is trying to gather information about the strength and depth of gilt demand at the moment,” said Daniela Russell, head of UK rates strategy at HSBC Holdings, who predicted the need for an intervention last week. BLOOMBERG
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