City turbulence drives some bond yields into negative territory

Turbulence in City markets have driven yields on some bonds into negative territory as the Bank of England pressed on with its post-Brexit economic recovery plan.

Threadneedle Street wants to buy £60bn of government bonds, or gilts, in the coming six months as part of a package of measures intended to counter any slowdown in the economy after the vote to leave the EU.

The plan – part of its quantitative easing (QE) programme – stumbled on Tuesday when it failed to buy as many bonds as it has asked for. But on Wednesday, the Bank could have bought almost five times as many bonds as it needed.

Anticipation that the Bank will keep buying bonds has helped push up their price – which in turn pushes down on the yield – and for some three- and four-year bonds the price rose so much that the yield turned negative.

Negative yields have happened once before since the 23 June vote, effectively meaning that the government does not have to pay any money to encourage investors to buy its debt.

The Bank easily found sellers for bonds with a maturity of seven to 15 years on Wednesday – in stark contrast to its struggle to attract investors willing to part with bonds with a maturity of 15 years or more the day before.

When longer-dated bonds were sought on Tuesday, the Bank failed to attract the amount of sellers it was seeking for the first time since QE was initiated in March 2009.

The Bank will make up the £52m shortfall from Tuesday in future buybacks – which also helped push up the price of gilts.

Before news that the Bank was offered 4.71 times as many seven- to 15-year gilts as it was looking to buy, interest rates on bonds had fallen to record lows amid concerns about the effectiveness of the Bank’s stimulus package.

Yields on 10-year gilts fell to 0.53% and the long-dated 30-year gilt yield fell to 1.29%.

The Bank has six months to buy the £60bn of bonds, and has set out a programme to buy short-dated gilts, long-dated gilts and medium-dated gilts each week. At Monday’s buyback of short-dated gilts, the Bank received offers for more than three times the amount it wanted to buy.

Markus Allenspach, the head of fixed-income research at Julius Baer, said the problem was more likely to be with the longer-dated gilts, which are important to insurance funds. “There is, so to say, an institutionalised demand for long-dated paper which could make it hard for the BoE to achieve its targets for gilt purchases,” he said.

But Daniela Russell, bonds strategist at Legal & General Investment Management, said it was too early to say if pension funds were going to be reluctant to sell long-dated gilts. “The Bank will take a lot of heart from the result today,” she said.

QE is part of a number of measures announced by Mark Carney, governor of the Bank of England, when he cut interest rates to 0.25% last Thursday.

Darren Bustin, head of derivatives at Royal London Asset Management, said the Treasury could be forced to find ways to bolster the economy if the Bank’s stimulus programme did not work, pointing to a possible VAT cut in Philip Hammond’s first autumn statement.

“Today’s announcement has the Bank kicking the can down the road and has created a ‘wait and see’ scenario for investors looking at reasons for the failure. As quantitive easing was meant to have been a solution for the problems facing the British economy following Brexit, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution,” he said.

As it launched Wednesday’s buyback, the Bank said it would “incorporate the £52m shortfall from yesterday’s uncovered operation within the second half of the current six-month purchase programme”.