Quantitative Easing - April 2009
23 April 2009
Two more rounds of Gilts purchase QE this week ahead of the Budget on Wednesday. Total Gilts purchases of £6.5Bn n Monday/Tuesday attracting tenders amounting to £18.3Bn – giving composite cover of 2.8x.
The Chancellor did not mention the words quantative easing during the course of the Budget – probably at the request of the Governor who must be desperate to maximise the distance between the Bank of England and the Government’s ballooning borrowing predictions. So no new guidance from there!
09 April 2009
So - no change in Bank Base Rate last week (no surprise there) and the Bank announces it has purchased over £26Bn under the QE programme.
Is it working? Well in the period since QE was announced at the end of January Swaps have yo-yo’ed and are now cheaper at the very short end (1-2 years), more expensive in the middle of the range (5-7 years) and identical at 10 years. Of course we can’t say what they would have been without QE but at least LIBOR has made a markedly greater movement over the month since the last announcement on Base Rate (45bps) than in the preceding month (12bps).
So even though the falls in LIBOR rate are still lagging the 50 bps cuts in Base Rate the movement in the past month has been very significant and LIBOR stands at a premium of only just over 100bps to BBR. How long before it comes down to a more “normal” level of say 25bps? – the truth is that nobody has the slightest idea!
6 April 2009
Today’s APF of gilts attracted £9.1Bn of bids against the £2.5Bn that was on offer – thus restoring a somewhat healthier cover of 3.65x. Four weeks into the purchase program total purchases under this scheme now amount to £21.5Bn out of the total target for the (first) three months of the scheme of £75Bn. From this it would appear that the plan is to spread the £75Bn evenly over the three month period.
In addition there have been purchases of short-dated Corporate Bonds under APF – starting 25 March – and now totalling just over £300m. It is intended that bonds purchased under this scheme will be held to maturity. These purchases are small beer in relation to the gilts purchases – but doubtless helpful in terms of establishing a market in prime bonds. The prices paid have been determined in relation to the credit agency ratings of the bonds A1 at 25bps over risk free swap rates, A2 at 125bps and A3 at 300bps. Issuers of bonds may apply to BoE for their bonds to be included in this scheme which is open to corporates (UK or otherwise) that have a significant presence in the UK - there are currently some 140 eligible bonds. Hence in addition to names that might be expected on the list such as Tesco, United Utilities, Aviva and Centrica (to name but a few) – there are also some more surprising names such as Deutsche Telekom and Electricite de France.
1 April 2009
The APF auction rumbles on with bids of 4.36Bn of bids against the available £3.5Bn - this represents cover of 1.25 X
There is a downward trend on SWAP rates with 5 year SWAP now at 2.99% and 3 year at 2.03%. Whilst both have been at this level in late January, there is a view that current reductions may reflect some benefit from the APF programme.
