LONDON: The Bank of England paid a high price to buy government bonds from investors on Tuesday, the latest sign that its plan to soften the Brexit hit to Britain's economy faces more of a challenge than initially thought.
The BoE said on Tuesday it received fewer offers of long-dated bonds from investors than at a similar auction last week, part of its quantitative easing programme.
The offer-to-cover ratio fell to 1.54 from 2.67 at an auction on Aug. 16 as it bought 1.17 billion pounds of gilts with maturities of 15 years and longer.
Government bond prices rose after the so-called reverse auction with gilt futures jumping nearly 40 ticks. Yields on 10-year gilts fell closer to their recent record lows, while German yields also touched a one-week low.
"When you look at the single bonds, what you see is that the Bank had to pay up quite significantly, in some cases more than a point for the highest price to get to these cover ratios in the first place," Peter Schaffrik, chief European strategist at RBC Capital Markets, said.
"So I think that's what's spooking markets a bit."
The Bank of England revived its government bond-buying programme earlier in August as part of a broader package aimed at cushioning the blow to the economy from Britain's vote in June to leave the European Union.
It is the second time in three weeks that the BoE has struggled to buy long-dated gilts that are typically less liquid than other maturities. They are favoured by institutional investors who want assets to match their liabilities.
At its first buyback of long dated gilts after reviving quantitative easing in early August, the BoE fell slightly short of its target in an early slip-up which raised questions about the efficacy of the central bank's latest measures.
"I suppose after last week, everyone thought that the first week was a freak. This week it is a reminder that it wasn't a freak," Marc Ostwald, strategist at ADM Investor Services, said. "But I wouldn't have really expected it to be nearly as good as last week given that there isn't any supply this week."
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