BoE's bond-buying struggles reverberate across euro zone markets

LONDON: German bond yields fell to a one-week low on Tuesday after the Bank of England had to pay up to prise long-dated bonds from reluctant investors in an auction for its relaunched quantitative easing scheme.

The falls in yield seen across euro zone markets tracked those in British bonds after the reverse auction -- the third since the bank relaunched QE earlier this month -- showed further evidence of an unwillingness by investors to sell debt that could prove problematic for the central bank's stimulus.

The Bank of England said the offer-to-cover ratio on its reverse auction of Gilts with maturities of 15 years and above was 1.54 on Tuesday, down from 2.67 last week. The first operation two weeks ago was a technical failure. Analysts said the BoE also paid a high premium for the bonds, comparing the highest price paid to the weighted average price at the auction.

"The market reaction suggests the Bank of England will struggle to buy back bonds," said Lyn Graham-Taylor, a fixed income strategist at Rabobank. "But it's still too early in the process to reach a conclusion."

Some strategists have said offers should pick up after the summer as investors return to their desks, but others warn there is a structural demand for higher-yielding bonds from pension and insurance funds which is unlikely to diminish. German 10-year yields reversed an earlier rise and were down 2 basis points on the day at a one-week low of minus 0.10 percent. British bond yields also fell 2 bps to 0.54 percent, not far from a record low of 0.50 percent struck early last week.

Most other euro zone yields were lower on the day, giving up an earlier rise prompted by better-than-expected euro zone data that was seen pushing back the need for imminent easing from the European Central Bank.

Markit's flash composite Purchasing Managers' Index edged up to a seven-month high of 53.3 from July's 53.2, where any reading above 50 indicates growth. A Reuters poll of economists had predicted a slight dip to 53.1.

The numbers prompted JP Morgan to drop its expectations for the ECB to cut interest rates, or announce an extension of its bond-buying programme in September.

"We are completely removing the rate cut from our forecast, as the ECB is unlikely to feel enough pressure from the current growth data or from the currency," Greg Fuzesi, euro area economist at JP Morgan, said.