Wednesday, 11 March 2009

QE gets under way

UBS Investment Bank reports:
"The Bank of England embarks on its quantitative easinig effort today with a £2 billion gilt purchase. This will the first of a bi-weekly event that will continue for the next 3 months until the Bank has acquired around £75 billion of gilts and corporate bonds."

Purchases will be made via a reverse auction, in which sellers determine the price that the BoE pays. The Bank will hold only one auction this week, but there will be two per week from next week on Mondays and Wednesdays. The central bank will take non-competitive offers until 12:00 p.m. on auction days, announcing the amount it will allot to such offers at 1:00 p.m.. It will then also publish the size open to competitive offers, and will take bids for that operation between 2:15 p.m. and 2:45 p.m. British time. It will announce the results of that operation soon thereafter.

In today's auction the BoE has specified it wants to buy £2 billion of Gilts maturing from 2014 to 2018. M&G's bond team note, via their blog, Bond Vigilantes:
"The Bank is not buying back sub 5 year paper as part of this programme, as that is where overseas Central Banks (big financers of the UK budget deficit) own gilts, and it could lead to a big reduction in the gilt market's investor base and a possible knock on impact on the £ if overeas investors sold their gilts back to the authorities. Nor is the Bank buying gilts over 25 years in maturity, which would exacerbate the illiquidity in ultra long dated gilts, and possibly cause further problems for pension funds."

Auction results
The reverse auction was 5.25 times subscribed as the BoE receioved offers of £10.5 billion and bought £2 billion. Bull flattening is under way, with the UK 10-2 spread having tightened by 50 bps since the BoE first announced QE on Thursday.

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