Bank of England abandons part of QE program after traders make bonds too expensive

The Bank of England was forced to abandon part of its quantitative easing (QE) programme after city traders made government bonds too expensive for the Old Lady to buy.

By Ben Harrington
10:45PM BST 10 Oct 2011

In a highly unusual move on Monday, the Bank of England refused to buy bonds with a maturity of 2017 and yield of 8.75pc after dealers drove up the price to £140.78 ahead of the auction.

The Bank of England has never previously refused to buy government bonds as part of a reverse auction [a sales process whereby market makers and traders sell government gilts to the Bank of England].

In a statement, the Bank of England said: “The Bank has decided to reject all offers against the 2017 government bond following significant changes in its yield [a reflection of the gilts price] in the run-up to the auction.”

A person close to the situation said: “The price of the 2017 bond behaved very strangely compared with other gilts the Bank of England was buying on Monday.”

John Wraith, a fixed-income strategist at Bank of America Merrill Lynch, told Bloomberg that traders had been pushing the price of the 2017 bond up “aggressively, obviously in the hope that they’d be able to sell it to the Bank of England”. Mr Wraith added: “The Bank of England rejected it [the 2017 bond] and that might have given people a bit of a shock. There would have been some people who hoped that the bank would be willing to pay significantly higher prices for the bonds.”

Last week, the Bank of England shocked financial markets when it decided to take pre-emptive action to rescue the faltering economic recovery by increasing its money printing programme by £75bn.


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