Last week the Bank of England announced that it would increase quantitative easing (QE) by £70bn – £60bn of gilt purchases and £10bn of corporate bond buying . The Bank said in a Market Notice issued on 4 August that from 8 August until the end of October it initially intended to buy £3.51bn of gilts each week, split equally between three different maturity bands : 3-7 years (on Mondays), over 15 years (Tuesdays) and 7-15 years (Wednesdays). The £3.51m a week figure was pitched to take account of both the announced extra QE (to be spread over six months) and the £12.1bn the Bank will be receiving on 7 September from the maturity of 4¼% Treasury 2016, bought under an earlier round of QE.

On 9 August some problems emerged. The Bank attempted to buy £1.17bn of conventional gilts with maturities exceeding 15 years, as planned, but was only able to find sellers of £1.12bn of stock, despite reportedly bidding above market price. The holders of the long dated stock – typically pension funds and insurance companies – just did not want the problem of having cash to reinvest when they already had an asset that matched their liabilities.

It is worth putting the Bank’s planned purchases into context. The Bank sets itself a limit of holding no more than 70% of the ‘free float’ (ie total issue minus government holdings) for any particular stock. According to the Bank, as at 27 July that meant there was £221.7bn of 15+ years stock available to purchase. For 3-7 years and 7-15 years the corresponding amounts were £100.0bn and £68.6bn. The fact that the Bank was planning equal amounts of purchases across all three maturities shows that it was already aware that fishing in the biggest pool would not be easy.

Another way of looking at the Bank’s actions is to consider that the Treasury’s planned conventional gilt issuance this year is £74.5bn (of which £27.3bn is long dated). As the Bank will also have to reinvest £11.16bn from the maturity of 1¾% Treasury 2017 in January bought under QE, the planned new £60bn QE purchase will see the Bank effectively mopping up nearly £9bn more than all of 2016/17’s conventional gilt issuance. Add to this the fact that the Bank plans to buy about 7% of the investment grade non-financial corporate bond market and it is little wonder the institutions are reluctant sellers.

COMMENT

There were questions raised last week about the effectiveness of further QE, but that was mainly about its ability to stimulate the economy. The Bank’s day two problem with gilt purchases is a reminder that we are running out of monetary policy ammunition and that the government needs to act on the fiscal front. There nothing is not due to happen until the Autumn Statement, probably at least three months away…