Gilts with maturity dates of over five years and under 25 years rallied strongly ahead of the BoE’s unprecedented reverse auction on Wednesday, the first step in its plan to buy up to £75 billion of government debt from institutions. Yields have since fallen to around 3 per cent.
Further auctions are scheduled for next week when the Bank will bid for £2bn of 10 to 25-year bonds on Monday and £3bn of 5 to 10-year bonds on Wednesday.
Leaviss says it is “extremely dangerous” to be short of the gilts market for the foreseeable future because the Bank of England has indicated that it is prepared to buy the securities at whatever price current holders are willing to demand at the auctions.
He says: “The Bank is saying: ‘we will buy gilts at whatever level you want to sell them to us because we want you to buy risky assets instead’. So, far from being dear at 3 per cent yields, ten-year gilts could rally to 2 per cent, or even lower. Remember, Japanese 10-year government bonds hit yields of 0.5 per cent in 2003.