Bank of England open days

As Bloomberg notes, the BOE’s failure to reach its target on Tuesday is an early warning of the challenges it may face in expanding its QE plan. A big part of the problem for the central bank is that it already scooped up about a third of the U.K. government bond market as part of a program that started in March 2009. And, with yields already at all time lows, it has just run into the same problem that we warned back in 2014 will haunt the BOJ: a lack of willing sellers. Ironically, even as the BOJ has stumbled from one monetary policy embarrassment to another, it never had a failed POMO. It was up to the Bank of England to demonstrate what a bond shortage really means.

But why the lack of sellers? Well, since the BOE paused purchases in 2012, global bond yields have tumbled, meaning investors may be less willing to part with longer-term bonds that tend to offer higher yields than their shorter-dated equivalents. Long-dated U.K. bonds are in particular demand from pension companies that hold the securities to match their liabilities.

“You’d understand why investors might not be keen to offload longer bonds - if you are looking for yields that’s the only place on the curve to be, ” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA.

Longer-dated bonds are “an area where people are hunting down what yield is left - you have to extend out into that area to get anything really, ” Aberdeen’s Hickmore said. Carney “is going to say ‘it’s very early days, this is day one of the long-end purchasing.’”

Whatever the reason, and however the BOE will try to justify this striking failure, Mark Carney has a major problem on his hands: according to last week's announcement, the BOE hopes to increase its holdings of government securities by 60 billion pounds ($78 billion) to 435 billion pounds over the next six months. However, if today is any indication, it will fail.

Tomorrow the market's attention will be fixated on the BOE's Asset Purchase Facility website (link) then another open market operation, this time in the seven- to fifteen-year sector, is scheduled to take place. Another uncovered failure like today, and alarm bells will be going off everywhere, not to mention that Gilt yields will implode.

Just as importantly, the BOE has said that "the Bank will announce its response to the shortfall in today's uncovered operation at 9am tomorrow."

We can't wait, and neither can SocGen's Jason Simpson: “It is a bit of a surprise that this went uncovered in the first week of the operation,