QE Update w/e 17 April 2009

Two rounds of Gilt Auction Purchases this week - for a total of £6.5Bn attracting offers for £17.4Bn – representing cover of  2.7x.

 

Purchases of Corporate Bonds/Commercial paper continue to be negligible in relation to the Gilts purchases, so that total (net) purchases to date amount to:

                                                £million

Gilts                                        31,495

Corporate Bonds                          345

Commercial Paper                     2,376

Doubts in various quarters about the effectiveness of the QE programme are now moving from being rejection of the concept almost as a matter of principle to people expressing specific reservations.  So for example if the interest spread over risk free reference rate paid in the QE program is 300bps on A3 Bonds (75bps on A1 Bonds) – why has Rio Tinto just had to pay 9% on its recently issued bonds.  Is Rio Tinto really so far off prime to justify this interest rate or is the QE program creating a select group of bonds that trade at a significant premium to the market as a whole without influencing the cost of money to companies as a whole?

 

And at the same time as some commentators (including the Governor) start to express concerns about the need to sell the gilts back into the market at some point in the future, an economist at BNP Paribas has suggested that the QE programme will need to be double the current cap of £150m to have the desired effect.  Just proves the old adage that if you ask three economists a question you will end up with four different answers.

 

So will QE and the way it has been implemented by the Bank of England prove to be the most mismanaged central bank operation since the Chancellor of the Exchequer cleverly depressed the price of gold 10 years ago in May 1999 before starting the largest ever sell off of gold?  Who knows – but there does appear to be some agreement that any effects of QE will take at least 12 months from implementation of the programme before it can really start to benefit the economy.  And by that time BoE will have spent £150Bn (or £300Bn if BNP Paribas is to be believed) – this is some gamble!