Threadneedle Street was forced to pay a premium on £1.17bn worth of government debt because of low market supply yesterday. This caused the going rate for UK bonds to spike, prompting some analysts to suggest it was unsettling already-nervy investors.
“By distorting markets, suppressing saving, and increasing the funding strains on many pension schemes, quantitative easing is fast becoming the problem, not the solution,” said Neil Williams, chief economist at Hermes.
The bond auction, the third of its kind since the referendum, marked the latest snag for governor Mark Carney’s emergency stimulus package in the wake of the referendum, which has included slashing interest rates to a new all-time low of 0.25 and a package to buy £60bn of government bonds and £10bn of corporate debt.
The Bank's Brexit package
The first stumble was a shock failure to buy enough bonds during its first attempt earlier this month. Demand for the bonds has also proved insatiable prompting a call from investors for the UK’s Debt Management Office to issue more long-term bonds to satisfy demand.
Government yields, which are already hovering around record lows following the dash to safe havens after the referendum, sunk lower on the back of the auction, raising the prospect of even wider pension deficits.
Benchmark 10-year UK government debt now returns just 0.54 per cent, a dramatic fall from 1.4 per cent weeks before the vote.
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With yields already at record lows, there are fears that the programme, which works by buying ultra-safe debt and encouraging investors to seek out riskier, higher-yielding assets with the money they receive from selling, has prompted a dangerous scramble for returns.
“Markets continue to be dominated by flows into emerging market assets and anything with yield,” said Societe Generale’s Kit Juckes.
Bank of America Merrill Lynch’s head of rates, Mark Capleton, added: “By design, the portfolio effect is to encourage investors to take more risks. The Bank can’t fine-tune the risk that investors are going to take.”
Others raised concerns that the programme, while messing with market rates, was failing to boost inflation, growth, or secure financial stability. Shaun Richards, an economist and former bond trader, told City A.M: “We face the possibility that this is not working and we will need ever lower interest rates.”