NTMA gives Carney lesson in bond-buying

Mark Carney was left red-faced on Tuesday when he failed to buy all the bonds he wanted in an effort to boost the UK economy following the Brexit shock through an expanded quantitative-easing programme.

In the auction, the Bank of England governor had planned to buy £1.17 billion (€1.36 billion) of UK government bonds – or gilts – that are due to be repaid in more than 15 years’ time. He fell £52 million short of his target, prompting a barrage of negative headlines in the financial press.

The problem is that investors such as pension funds, starved of income as quantitative easing efforts from Europe to Japan have pushed down bond yields to record lows, are reluctant to sell long-dated bonds. These tend to offer more yield, or income, than shorter-term debt.

Negative yield

As much as €12 trillion of bonds globally – mainly short-dated notes – currently carry a negative yield. This means that investors are paying governments and companies for the privilege of holding their money.

But Carney seemed to have learned his lesson on Wednesday when he went out into the market seeking to buy bonds due to be redeemed in seven to 15 years. He got offers of almost five times the amount of gilts that he was seeking.

You’d be forgiven for thinking Carney was the only man active in European bond markets at the moment.

However, staff in our own national debt office have also been busy in recent days, quietly buying back €125 million of short-term bonds due to be repaid between next year and 2020 – all of which are negative yielding. The National Treasury Management Agency (NTMA) swapped most of the notes – about €75 million worth – for 2045 bonds, which are currently priced in the market to yield 1.1 per cent.

NTMA figures show the agency has swapped some €700 million of 2045 bonds for shorter-term debt since December.

This chips away at the Government’s near-term refinancing needs. But it’s a big mountain – with €50 billion of bonds due to be mature between now and the end of the decade.