In the first week of August the Bank of England (BoE) reduced its official rate, known as the Bank Rate, to 0.25%, in a move widely expected after the UK’s EU “Brexit” vote. Along with the rate cut, the BoE extended some quantitative easing programmes where it would buy additional gilts (UK government bonds) and expand the programmes to include an additional £10 billion of corporate debt. Quantitative easing is the polite way of saying money printing.
The programme has already hit a snag. In the first reverse auction after the announcement, the BoE’s offer to buy £1.17bn of long-dated gilts was not rushed by sellers and there was a £52 million shortfall. The amount was not great in relative terms but the low uptake was unexpected. Yields on 20 year and 30 year gilts fell to 1.22% and 1.36% respectively on the day and then continued to fall for the next two days.
The reasons for the shortfall appear to be in two camps. The first is that investors anticipate higher prices from the BoE at future auctions, the second is that some holders of government debt are reluctant to sell. The latter might be pension funds and other investors that are mandated to hold government debt. It is quite possible they are fearful of selling their bonds lest they have to buy them back at even lower yields. The moral hazard of buying debt and fearing losses diminishes the more central banks keep buying bonds under their quantitative easing programmes.
This is another example of where textbook or academic theory meets resistance from real world scenarios.