U.K. Bonds Climb as BOE Pays Premiums for Long-Dated Securities

(Bloomberg) -- U.K. government bonds advanced as the Bank of England paid a premium to secure the purchase of longer-dated bonds in its expanded quantitative-easing program, just two weeks after a similar operation went uncovered.

The yield on 30-year gilts reversed an earlier increase after the central bank’s reverse-auction results showed it paid more than market prices for 1.17 billion pounds ($1.54 billion) of securities due in more than 15 years. It received offers for 1.54 times that amount, down from the coverage ratio of 2.67 in a reverse auction for similar securities a week ago. The BOE bought all offered bonds at a premium, while at previous transactions most of them were bought at a discount.

U.K. Bonds Climb as BOE Pays Premiums for Long-Dated Securities

“There is no imminent danger there, but obviously 1.54 times is not that great given that this is only the third operation” involving longer-dated gilts, said Jason Simpson, a fixed-income strategist at Societe Generale SA in London. “In theory it should be fine at the long end, but the wide pension deficits and the lack of supply until we get into September and beyond, is making corporate pension funds reluctant” to sell their gilts, he said.

The yield on 30-year gilts fell four basis points, or 0.04 percentage point, to 1.28 percent as of 4:29 p.m. London time. The 3.5 percent security due in January 2045 rose 1.105, or 11.05 pounds per 1,000-pound face amount, to 152.86. The benchmark 10-year gilt yield fell one basis point to 0.55 percent.

Failed Reverse Auction

A miss at the BOE’s first reverse auction of the same maturity debt on Aug. 9 -- the first uncovered QE operation in the plan’s history -- led to the BOE accepting all submissions, even as some investors offered bonds at above the prevailing market price. The shortfall sparked speculation officials may struggle to find enough bonds to complete their planned program.

A second reverse auction for long-dated debt met its target on Aug. 16. That was followed by a government sale of 2055 gilts the following day, which may have encouraged more holders to sell to the BOE.

The central bank is trying ward off an economic slump by injecting more money into the economy through quantitative easing and through other measures after signs that Britain’s June 23 decision to leave the European Union is starting to hit confidence and business output.