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Has Bank of England’s QE package overshot its mark?

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Bond prices have spiked causing yields to fall following the Bank of England’s latest tranche of bond buying, prompting some to question whether the Bank’s QE package has gone too far.

Yesterday, the Bank of England bought £1.17bn of gilts with maturities of 15 years or longer as part of its stimulus programme.

In the reverse auction it saw a significant fall in the number of offers it had for the bonds on the previous auction, falling from 2.67 times cover to 1.54 times that amount. However, it is an uplift from previous weeks when it failed to attract enough sellers.

The move meant the Bank paid a premium for the bonds, causing long-term gilt yields to jump.

This has sparked concern that the Bank’s recently announced £70bn QE programme has gone too far.

Alongside a 25 basis point interest rate cut, the BoE announced earlier this month a £60bn extension to QE and a £10bn corporate bond buying programme.

Hermes chief economist Neil Williams told City AM: “By distorting markets, suppressing saving, and increasing the funding strains on many pension schemes, quantitative easing is fast becoming the problem, not the solution.”

Since Brexit benchmark 10-year UK government debt yields 0.54 per cent, a large fall from 1.4 per cent weeks before the vote. Fears have been raised that the continued gilt buyback will push investors into rushing for returns elsewhere.

Bank of America Merrill Lynch’s head of rates Mark Capleton told the newspaper: “By design, the portfolio effect is to encourage investors to take more risks. The Bank can’t fine-tune the risk that investors are going to take.”

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  1. It would appear that many people in the BoE fail to grasp the concept that many people will simply not invest in “risk assets”, either because they cannot afford to suffer significant losses, or because they see the major volatility occurring in markets (at least partly due to central bank interventions) and it puts them off.

    I guess it’s the difference between knowing theory and reality….

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