U.K. Bonds Climb Before BOE Comments on QE Auction ‘Shortfall’

(Bloomberg) -- U.K. government bonds rose before the Bank of England makes an announcement in response to Tuesday's quantitative-easing purchases, where it failed to buy all the gilts that it sought on the second day of its expanded QE program.

Yields on 10- and 30-year securities fell to record lows after the transaction, the first that was uncovered since the central bank started its bond-purchase program in 2009 and an early warning of the constraints it may face.

The BOE, led by Governor Mark Carney, unleashed a flurry of measures on Aug. 4 to shield the U.K. from repercussions of its decision to exit the European Union. They included boosting its holdings of gilts, under the Asset Purchase Facility, by 60 billion pounds ($78 billion) over a six-month period from an existing stock of 375 billion pounds. The BOE is scheduled to conduct its third consecutive gilt-purchase operation Wednesday.

The central bank said on Tuesday it received offers to sell 1.118 billion pounds of gilts due in more than 15 years, compared with its target of 1.17 billion pounds. The BOE said it would “announce its response to the shortfall” at 9 a.m. Wednesday London time.

‘Early Days'?

Carney “is going to say ‘it's very early days, this is day one of the long-end purchasing',” said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management Plc., in an interview on Bloomberg Television. “We will see what happens in the next couple of days when he goes shorter with those purchases. He is more likely to get the size done that he needs there.”

Benchmark 10-year gilt yields fell two basis points, or 0.02 percentage point, to 0.558 percent as of 8:09 a.m. London time, having earlier dropped to a record 0.544 percent. The 2 percent bond due in September 2025 rose 0.225, or 2.25 pounds per 1,000-pound face amount, to 112.74. The nation's thirty-year gilt yield declined two basis points to 1.366 percent, and earlier reached 1.349 percent, its lowest-ever level.

In the first round of buying on Aug. 8, investors offered to sell 3.63 times the 1.17 billion pounds of gilts due between three and seven years that the BOE was seeking. The operation scheduled for Wednesday is for debt due in seven to 15 years.

Aberdeen's Hickmore said he “wouldn't be surprised” if the U.K.'s Debt Management Office issued “at the long end as well, to try and satisfy some of that demand and give Mark Carney more bonds to buy.”

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Todd White