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Explanations for the low takeup in the BOE operations

BOE
  • Governor Bailey's comments that funds had three days left and a reaffirmation that the Bank of England would step away from the market at the end of this week were in line with recent market notices released by the Bank. However, pension funds had been hoping that the operations would be extended, at least until the end of October, in order to give them more time to delever.
  • So this leaves us with a conundrum - if pension funds are that concerned why is the takeup in the BoE's purchase operations so low? Long-dated gilt purchases total GBP6.8bln (out of a total of GBP55bln on offer so far) while the linker purchases yesterday were less than GBP2.0bln (out of a total GBP5bln on offer).
  • There are three plausible explanations:
    1. Pension funds are reluctant to book the losses through selling gilts at a substantial loss and are waiting to see if yields fall further from here - a high stakes game of chicken that depends on the BOE maintaining support. This seems fairly likely to us. This would also explain Bailey's warnings yesterday.
    2. The situation isn't anywhere near as bad as pension funds are making out - they have managed to delever enough over the past 2 weeks to prevent any firesales being needed when the Bank steps away. This will be what the Bank of England is hoping.
    3. Pension funds are holding assets other than gilts which can't be sold back to the BOE - but losses would be booked if long-end yields were to rise. This would be the biggest problem as it would mean that unless the Bank of England took a much more active role in unwinding some of these positions, there would be the potential for renewed large selloffs when it steps away.
  • The Bank of England will announce the size of today's long-dated and index-linked purchase operations at 9:00BST.
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