If you thought Wednesday’s gilt auction failure was worrying for the government, its quantitative easing efforts, which rely on the market’s want to sell securities back to the Bank of England, are clattering rather than swimming along nicely.
Not only did Wednesday’s buyback of gilts see a far lower level of offers (covered 1.4x versus 3.2x on Monday), mostly on account of the bonds in the previous auction all selling below market prices at the time of the closing tender, investor interest for the Bank’s corporate bond auctions is increasingly waning.
At the buyback on Wednesday, the Bank of England bought only 85.5m, having said it was out to buy 125m. On Thursday it bought an even smaller 42.44m worth, having offered to buy £128 m.
So what’s going wrong?
Much of it probably has to do with the type of bonds that are eligible for purchase. Mostly, they are good quality corporate issues by the likes of Anglo American, British Telecom, BG, Tesco, Centrica etc.
These bonds are not the problem assets. Consequently, the government may be targeting the wrong types of bonds. It is corporate issues of financial firms that everyone wants to get rid of, and for which liquidity is sparse and pricing is an issue.
Which brings us back to the sudden and somewhat mysterious appearance of RBS and Lloyds ‘bond swap’ offers in the market. These, as FT Alphaville highlights , provide subordinated debt holders with the opportunity to swap their issues — be it at a discount — for senior unsecured paper instead.
Not to draw any firm conclusions, but it is interesting to note that both proponents of the scheme happen to be banks with major government ownership and the issues come just as the government’s corporate buybacks increasingly flounder.
Could it be that the government has exerted some executive pressure so as to facilitate an experiment into a whole new buyback measure? Who knows.
Related links:
Bond swaps – FT Alphaville
Swinging gilts – FT Alphaville
To much of a QE thing for Mervyn - FT Alphaville