LONDON (Reuters) - British gilt futures shed their early gains and underperformed bunds, after the Bank of England’s decision to inject 50 billion pounds of stimulus into the system over 4 months disappointed investors eyeing a slightly bigger boost.
Most analysts had expected that the 50 billion pounds of stimulus would be spread over 3 months, and some investors had been betting on an even bigger injection of 75 billion pounds.
The gilt market was also spooked by the BoE’s decision to spread its purchases equally between short- (3-7 yr), medium- (7-15 yr) and long-dated (+15-yr) gilts after some speculation it may choose to focus on long-dated bonds.
“By merely matching market expectations the MPC has failed to deliver the “shock and awe” it normally aims for when easing policy,” said Philip Rush, an economist at Nomura.
September gilt futures initially tumbled by more than half a point after the decision, to hit a session low of 118.99, but made back some ground, tracking Bunds higher after the European Central Bank cut its benchmark lending rate by 25 basis points to 0.75 percent.
At 1200 GMT, the September gilt future was 4 ticks up at 119.30, underperforming the equivalent Bund, which was 30 ticks up.
In the cash market, the yield on ten-year gilts was down almost 1 basis point at 1.712 percent and widening the spread against Bunds to 27.6 basis points.
“I think the slower pace (of purchases) is part of that,” said Sam Hill, strategist at RBC. “It (the BoE decision) is not as exciting as it could have been or as we were expecting.”
Yields on gilts with a maturity of 20 years and above climbed by as much as 10 basis points on disappointment the central bank would not focus on longer-dated debt.
Some investors had speculated the BoE might focus its purchases on longer-dated gilts, driving down yields in this maturity segment. Yields on long-dated UK government bonds climbed by as much as 9 basis points after the decision.
Record low yields on long-dated gilts have pushed many pension funds deeper into deficit and squeezed the rate of return on old people’s pensions, and Nomura’s Rush thinks that such concerns will have deterred the BoE from opting to buy more long-dated gilts.
“Although there is most “spare” capacity in the long bucket relative to the BoE’s self-imposed boycott of bonds with less than a 30 percent free float, the constraint on longer bonds seems to bind at a much higher free float than this. That is probably because of the need to hold those bonds for regulatory reasons,” he said.
editing by Ron Askew