Bank Of England Suffers Stunning Failure On Second Day Of QE: "Goodness Knows What Happens Next Week"

Tyler Durden's picture

It started off well enough.

On the first day of the Bank of England's resumption of Gilt QE after the central bank had put its monetization of bonds on hiatus in 2012, bondholders were perfectly happy to offload to Mark Carney bonds that matured in 3 to 7 years. In fact, in the first "POMO" in four years, there were 3.63 offers for every bid of the £1.17 billion in bonds the BOE wanted to buy.

However, earlier today, when the BOE tried to purchase another £1.17 billion in bonds, this time with a maturity monger than 15 years, something stunning happened: it suffered an unexpected failure which has rarely if ever happened in central bank history: only £1.118 billion worth of sellers showed up, meaning that the BOE's second open market operation was uncovered by a ratio of 0.96.  Simply stated, the Bank of England encountered an offerless market.


What makes this particular failure especially notable - and troubling - is that while technically uncovered sales of government securities happen frequently, and Germany is quite prominent in that regard as numerous Bund auctions have failed to find enough demand in the open market in recent years forcing the "retention" of the offered surplus, when it comes to a central bank's buying of securities, there should be, at least in practice, full coverage of the operation as the central bank is willing and able to pay any price to sellers to satisfy its quota.

For example, in today's operation, the scarcity led to the BOE accepting all submissions, even as some investors offered prices above the prevailing market. The highest accepted price for the 4 percent bond due in 2060, for example, was 194.00, compared with a weighted average of 192.152, which means that the happy seller obtained a yield well in excess of that implied by the market.

And yet, despite having a completely price indiscriminate buyer, some £52 million worth of bond sellers simply refused to sell to the BOE at any price!

The QE failure quickly raised alarm signals among the bond buying community. In a Bloomberg TV interview, Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management said that “lots of people are bidding us for bonds -- Mark Carney is now bidding me for bonds and he still can’t have them. The problem is he was trying to buy 15-year plus bonds today in the gilt market. That’s a really difficult area.”

Needless to say, immediately after the news that not even the BOE can buy all the bonds it needs to buy at any price, yields on 10 and 30-year gilts quickly dropped to new record lows. "Yesterday we saw a 3.63 cover in the short APF so this is a sharp difference that has really caught the market off guard,” said Daniela Russell of Legal & General Group in London, cited by Bloomberg.

We were surprised they didn't slide even lower. After all, if even the central bank is met with an offerless market, there is simply no price that is high enough, as ludicrous as that may sound, for longer-maturity gilts because the last marginal seller can demand any price from the BOE and they will get it.

As Bloomberg notes, the BOE’s failure to reach its target on Tuesday is an early warning of the challenges it may face in expanding its QE plan. A big part of the problem for the central bank is that it already scooped up about a third of the U.K. government bond market as part of a program that started in March 2009. And, with yields already at all time lows, it has just run into the same problem that we warned back in 2014 will haunt the BOJ: a lack of willing sellers. Ironically, even as the BOJ has stumbled from one monetary policy embarrassment to another, it never had a failed POMO. It was up to the Bank of England to demonstrate what a bond shortage really means.

But why the lack of sellers? Well, since the BOE paused purchases in 2012, global bond yields have tumbled, meaning investors may be less willing to part with longer-term bonds that tend to offer higher yields than their shorter-dated equivalents. Long-dated U.K. bonds are in particular demand from pension companies that hold the securities to match their liabilities.

“You’d understand why investors might not be keen to offload longer bonds - if you are looking for yields that’s the only place on the curve to be,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA.

Longer-dated bonds are “an area where people are hunting down what yield is left - you have to extend out into that area to get anything really,” Aberdeen’s Hickmore said. Carney “is going to say ‘it’s very early days, this is day one of the long-end purchasing.’”

Whatever the reason, and however the BOE will try to justify this striking failure, Mark Carney has a major problem on his hands: according to last week's announcement, the BOE hopes to increase its holdings of government securities by 60 billion pounds ($78 billion) to 435 billion pounds over the next six months. However, if today is any indication, it will fail.

Tomorrow the market's attention will be fixated on the BOE's Asset Purchase Facility website (link) then another open market operation, this time in the seven- to fifteen-year sector, is scheduled to take place. Another uncovered failure like today, and alarm bells will be going off everywhere, not to mention that Gilt yields will implode.

Just as importantly, the BOE has said that "the Bank will announce its response to the shortfall in today's uncovered operation at 9am tomorrow."

We can't wait, and neither can SocGen's Jason Simpson: “It is a bit of a surprise that this went uncovered in the first week of the operation, goodness knows what happens next week.”

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Perimetr's picture

What happens next week?

More digital currency!!!


38BWD22's picture



At extremely low interest rates, we enter a world that hardly anyone knows anything about...  I do not like the risks of being either a buyer (creditor) or a seller (lender).  Wake me up when this nightmare is over.

Physical gold is OK, bought with unborrowed money.

Bearings too, if you know where you can sell them and don't offer credit...


Latitude25's picture

International travel always seems to present great opportunities.  I have no idea what kind of idiots could downvote you dochen.

Pinto Currency's picture


A conjurer like Mark Carney, Knight of Malta, sometimes makes a mistake by using the wrong type of pixey dust.

You can create real wealth from nothing.  You just have to believe.

bamawatson's picture

or create nothing from real wealth

J S Bach's picture

After 300 years in existence, you'd think they would finally stop the pretenses.

The name of the criminal entity should be changed to reflect the truth:

"The Bank Of Rothschild".

Manthong's picture

Sterling? Sterling?

We don’t need not stinking tarnished Sterling.

ACES FULL's picture

OT>Just checked Platinum and Palladium futures for Sept...WTF. Anyone got any idea on the huge jumps? Check Did a strike start at the mines?

johngaltfla's picture

Gold up also as the dollar is impoding. 101 on USD/JPY about to be tested.

If we break 100.50 with volume and BoJ doesn't support, bad juju on the horizon.

jeff montanye's picture

negative yields on eleven trillion of bonds globally and a refusal to sell long gilts at any price to the bank of england.

what a top looks like?

JamesBond's picture

How about the government overhaul their banking system?


yeah.   dumb question of the day.



Mountainview's picture

Carney, worst of all the one trick ponies. He misinterpreted Brexit as negative. Brexit liberates the UK from the Brussels 9000 page rule book and will be a huge positive. The stockmarket got it right (FTSE booming since the vote).

Jim in MN's picture






WmMcK's picture
Sorry if this is inappropriate, is DoChenRollingBearing still active on this forum?
Straw Dog's picture

Haven't heard from him in maybe 6 months at a guess.

Treason Season's picture

With all due respect RR wtf have u been?


Here2Go's picture
Here2Go (not verified) Treason Season Aug 10, 2016 3:27 AM

Look up

Look down


See my thumb?


jeff montanye's picture

reduce and redistribute friction.

often used with lubrication.

as in ball bearings or roller bearings.

but not as in lost your bearing (don't know what direction you're going).

SomethingSomethingDarkSide's picture

I am so confused, it could be either.  Thank you for trying though!

RockyRacoon's picture

I been hangin'.  Developing dossiers on all you weirdos!

emersonreturn's picture

forgive me to interrupt but the ^ above jim is DCRB...he doesn't post often now but like jiMN is always read with interest.

nailgunner44's picture

"It's all ball bearings nowadays".

knukles's picture

And all of a sudden, a bazillion voices cried out, gemmedenbondsnoyoucanthaveem

McCormick No. 9's picture

It's the yleld warning. ANY positive yield bond won't get sold. Look, if I have a positive yield bond, a safe one, and if I sell that bond now into a market where prices keep going up, what am I going to buy with the money I got from selling the bond? A higher-priced, negative yield bond? That is fucking stupid. I'm going to hang on to my safe, positive yield bond. I'm not going to sell it to anyone. The only thing more atractive than my safe, positive yield bond is a safe bond with a better yield and a lower price.

Since that is what everyone wants, the first person who can offer that is going to get rich. And while that person is getting rich, they will also light the fuse for the economic destruction of the world.

Squid-puppets a-go-go's picture

Bond markets still elude me somewhat - what is the implication of this? That they now have no choice but helicopter money?

Lore's picture

Pardon my ignorance, but why does anyone want to hold ANY bond at this juncture, given that the REAL rate of return is negative?  I ask sincerely.  I'd like to understand the logic. 

otschelnik's picture

Speculators.  They're betting that the interest rate will go down, and the value of the paper will appreciate. 

Cryoprase the Troll's picture

>why does anyone want to hold ANY bond at this juncture

See my answer above. There are good reasons for major players. Maybe not for retail investors like me though. I've been taking profits on corporate and emerging market bonds. i.e. selling

UndroppedClanger's picture

The frightening thing is that a man ostensibly in charge of a key nation's monetary system apparently failed to anticipate this flaw in his Grand Plan.

SomethingSomethingDarkSide's picture

Gump, you're a god damned genius. aka McCormick

abyssinian's picture

Marc Faber said "sell everything, sell your wife first then the kids"  It all depends..... if the wife is young enough, he can afford to sell the kids first and have few more with the young wife! :)

abyssinian's picture

Marc Faber said "sell everything, sell your wife first then the kids"  It all depends..... if the wife is young enough, he can afford to sell the kids first and have few more with the young wife! :)

Here2Go's picture
Here2Go (not verified) abyssinian Aug 10, 2016 3:28 AM

Did he say anything about the 2nd wife?

zen0's picture

It has been going to decline by 50% for about 5 years now.


Buy gold, eh?


The neo- collapse is not going to resemble any previous collapse.


It never has.

Kirk2NCC1701's picture

Yeah, well, after monthly Doomsday Warnings from Faber and his perma-doom peddlers, he's FAR worse than my broken Cookoo clock.

Just another snakeoil salesmen, catering to his base of 'Believers', so that they'll keep their subscriptions to his 'sage' advice.  Perma-Bulls have Kool-Aid drinkers and Believers, as do Perma-Bears.  Reality is somewhere in between.

Latitude25's picture

Far worse than a broken clock?  Think about that for a minute.  How is that even possible?  There are no coincidences.

Postkey's picture

This individual disagrees.


Mike Norman Economics
An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). . . . .”

Every day the United States Treasury publishes data tables summarizing the cash spending, deposits, and borrowing of the Federal government.

He uses this data to draw, it seems successfully, conclusions re the state of the US economy and stock market.


He is still 'bullish' re the US economy.


new game's picture

johng, thanks for that link. tyme is running short for the "big short", ie. against the grain tyme.

since i've been out of the market for ten years it is becoming a tempting to market down.

only real question, a uuuuuge one, is the fed potent enuf to keep it up and overcome

trillions of head cut off chicks? that is the only question...

junction's picture

Time for another false flag attack to distract the proletariat.  Hope the NWO doesn't use a school as the target for its false flag attack by hired Muslim killers.

S Spade's picture

you're a nutjob. muslim by chance?

SomethingSomethingDarkSide's picture

Spade moonlights as a French Detective, can you believe it?  Lol.