Overnight Preview

August 10th, 2016 8:14 pm

Via Robert Sinche at Amherst Pierpont Securities:

Central Bank Rate decisions in New Zealand, Philippines, S. Korea, and Mexico…among others.  The BBerg consensus expects a 25bp cut by the RBNZ to a record low 2.0% Official Cash Rate, No Change by the BoK (record low 1.25%), No Change by the BSP (Philippines) and No Change by the BoM (4.25%).

CHINA: Over the next week, usually later in the period, China is scheduled to release monthly monetary data, including Aggregate Financing Activity. July is usually a slow month for financing, with the Bberg consensus expecting a slowing to CNY 1,000bn from CNY1,629bn in May.

AUSTRALIA: Despite low global inflation concerns, the Consumer Inflation Expectations remain elevated, with the August reading following a 3.7% print in July; the index has fallen below 3.0% in only 1 month – September 2013.

RUSSIA: Over the next two days Real GDP growth for 2Q is scheduled for release, with the BBerg consensus expecting a -0.8% YOY decline, versus -1.2% YOY in 1Q, as the recession winds down and a shift toward modest growth unfolds.

FRANCE: The Bberg consensus expects the EU Harmonized CPI to be confirmed at 0.4% YOY for July, matching the highest since October 2014.

ITALY: The Bberg consensus expects the EU Harmonized CPI to be confirmed at -0.1% YOY in July, the least negative reading since January.

UK: The Bberg consensus expects the RICS House Price Balance to be reported at +6% for July, down from 16% in June, which would be the lowest balance of price increases since April 2013.

SWEDEN: The Bberg consensus expects the Headline CPI will have increased 0.8% YOY in July, down from the 1.0% 4-year high reached in June.

MEXICO: The Bberg consensus expects Industrial Production growth will have inched up to 0.6% YOY in June from 0.4% YOY in May.

Commercial Real Estate Bubble?

August 10th, 2016 8:10 pm

Via Bloomberg:

Commercial Real Estate Bubble Has Begun, New Albion Says
2016-08-10 16:39:35.287 GMT

By Adam Tempkin
(Bloomberg) — The long-awaited transition of the
commercial real estate (CRE) mkt from “booming” to “bubble”
may be beginning; one indicator is that REITs are recently
picking up the slack in CMBS issuance, but doing so in a
leveraged fashion, New Albion Partners’ chief market strategist
Brian Reynolds writes in client note.

* A “significant” number of real estate related companies
have recently accessed the credit mkt:
* The first 3 days of this week has seen Boston
Properties, Hilton Escrow, Builders FirstSource,
Kennedy-Wilson, MGM Growth Properties, and Rexford
Industrial Realty tapping the credit mkt; additionally,
Diamond Resorts is coming to mkt to fund its buyout,
Reynolds says
* This activity may mark the transition to the beginning
of a CRE bubble, “which is likely to last until two yrs
after the yield curve inverts”
* Given pensions’ desire for real estate related debt,
“we believe that lending to REITs will help push CRE
lending to new heights by early 2017 and keep propelling
it higher for yrs to come”
* This should make the CRE bubble, and the eventual
bust, more intense, Reynolds says
* New regulations of this cycle, such as Dodd-Frank, are
“critically flawed,” and have contributed to much lower
CMBS volumes vs. the market’s 2008 peak
* Historically, regulatory efforts to limit a certain
product or activity without dealing with the core issue
of pensions’ and insurers’ outsized need for above-avg
mkt returns actually have produced more, not less,
systemic risk, Reynolds says
* “And now, we think the limits on CMBS are going to lead
to more, not less, CRE lending”
* Historically, credit booms have led to bubbles elsewhere
including:
* 1990s credit boom led to fiber bubble for WorldCom,
pipeline bubble for Enron
* 2003-2007 boom leading to housing bubble
* 2009 boom leading to commodities bubble
* NOTE: New Albion Partners LLC is an institutional agency
equity and equity derivatives brokerage firm. It offers
macro-level strategy, derivative strategy, and equity/equity
derivative execution expertise to hedge funds, investment
advisers, mutual funds, pension funds, and other
institutional asset managers, according to its website

Ten year Note Auction

August 10th, 2016 11:42 am

Via Ian Lyngen:

We are optimistic about this afternoon’s 10-year auction and expect non-dealer interest to be a significant test of overseas demand for the sector at current yield levels. We see the risks skewed toward a stop-through. Foreign awards at the last four Refundings have increased moderately to 28.3% from 27.7%, leaving overseas bidders as a key wildcard and one we suspect will ultimately be supportive.  The success of Tuesday’s 3-year auction despite the headwinds of summer liquidity conditions, the lowered dealer risk-taking, and the absence of a pre-auction concession all suggest the similar factors facing 10s shouldn’t prove an inhibition to a strong takedown. The flipside of the lack of a concession this morning is a firmer tone in Treasuries and an improving technical picture as stochastics have now fully crossed in favor of lower yields.  Moreover, 10s are relatively cheap for an auction day vs. 5s and 30s and recent history shows that five of the last six new 10-year auctions have stopped-through an average of 1.0 bp.    That said, if sponsorship is light and the auction tails, it will be a function of the outright level of yields more than any broader commentary on the Treasury market and its direction.

• Recent new 10-year auctions have met strong receptions with five of the last six Refundings stopping-through an average of 1.0 bp.

• Foreign awards at 10-year Refundings have been increasing slightly over the last four auctions, taking 28.3% or $6.7 bn vs. 27.7% or $6.7 bn at the prior four. In addition, investment fund interest has been gaining over the same period, taking 45% or $10.5 bn vs. 37% or $9.0 bn in the prior four.

• Indirect awards have increased, taking 64% at the last four Refunding auctions vs. 53% at the prior four.  Over a comparable period, direct bidding has fallen to 12% vs. 16% prior.

• The technicals are increasingly bullish and we’re watching a stochastics cross this morning that is particularly constructive. For resistance we like the NFP-day low-yield mark of 1.482% with 1.50% an obvious level of note as well.  Below those levels we’ll focus on an opening gap at 1.453% to 1.460% before the 61.8% retracement of 1.440%.  Support comes in at a very small gap from this morning at 1.547% to 1.544% with little between there and the recent high yield-close at 1.592%

Libor

August 10th, 2016 11:40 am

Via Bloomberg:

USD 3-Month Libor May Reach 105-110bp by End of 2016, Citi Says
2016-08-10 14:14:18.137 GMT

By Alexandra Harris
(Bloomberg) — Estimate based on the idea that prime fund
managers maintain “high levels of liquidity” after Oct. 14
reform deadline to guard against a “late surge in outflows”
and market may start pricing in a Fed rate hike in December,
Citi strategists Vikram Rai and Jack Muller said in note.

* In near-term, Libor may rise another 6-8bp if the “fear-
driven liquidity buildup’” causes institutional prime funds
to reduce their weighted avg maturities (WAMs) by another
3-4 days
* Liquidity buildup efforts have caused a “vicious
feedback loop” where cheapness in long-maturity
unsecured paper isn’t reflected in prime fund yields so
opportunity cost of converting to govt funds remains low
* “The much feared large outflows from institutional
* Limited funding alternatives for non-U.S. banks in the Libor
panel may also put upward pressure on the rate
* Japanese banks have about $125b-$150b of CP/CD maturing
in Aug.-Sept. 2016 and if even 50% of debt has to be
refinanced via non-2a-7 accounts, it may cause Libor to
rise
* NOTE: Libor set at 0.8176% vs 0.8160% yday

FX

August 10th, 2016 7:26 am

Via Marc Chandler at Brown Brothers Harriman:

FX Consolidation Resolved in Favor of Weaker US Dollar

  • If there is an overarching theme, it is that rates will be lower for longer, globally
  • Beginning with last week’s stronger than expected increase in cash wages, Japan’s data has been surprising to the upside
  • Stronger than expected Norwegian inflation has sent the krone sharply higher
  • France reported dismal June industrial output figures
  • The Brazilian Senate voted late last night to continue with the impeachment process; today, Brazil reports July IPCA inflation

The dollar is broadly weaker against the majors.  The Norwegian krone and the dollar bloc are outperforming while sterling and the Swiss franc are underperforming.  EM currencies are broadly firmer too.  KRW and MYR are outperforming while RUB and IDR are underperforming.  MSCI Asia Pacific was up 0.4%, despite the Nikkei falling 0.2%.  MSCI EM is up 0.5%, the fifth straight day despite Chinese markets falling 0.4%.  Euro Stoxx 600 is down 0.3% near midday.  S&P futures are pointing to a lower open.  The 10-year UST yield is down 1 bp at 1.54%.  Commodity prices are mostly higher, with oil down 1%, copper up 1.2%, and gold up 1%.

The robust US jobs report at the end of last week had arrested the down draft seen the previous week in response to the disappointing Q2 GDP report.  The mostly sideways movement has given way to a broader pullback today.  The greenback is heavier against all the major and most emerging market currencies today.

There does not appear to be a fundamental driver, which does not mean that the dollar’s losses cannot be extended.  The US economic calendar is light with mortgage applications, the JOLTS report on job openings, and the monthly federal budget, which do not have the heft to change trends.  It is true that the probability of a Fed hike in September has eased to 24% from 26% at the end of last week, but for all practical purposes, it is a difference without significance.  

If there is an overarching theme, it is that rates will be lower for longer, globally.  This may be underwriting risk taking, though equity markets are mixed.  Still, the MSCI Emerging Market equity index is up 0.4%, extending its streak to the fifth consecutive session.  It is at its best level since July 2015.  Although the Japanese and Chinese markets slipped lower earlier today, the MSCI Asia Pacific Index also extended its advance.  Since July 22, the index has been down in only two sessions.  

European bourses are mixed, and this is leaving the Dow Jones Stoxx 600 practically unchanged in late-European morning turnover.  Financials are the strongest sector (+0.4%), and within it, the insurance sector is leading with a 0.8% advance while banks are up 0.4%.  The FTSE’s Italian bank index is up 1.4% to extend its recovery into a fifth session.  

Bond markets are broadly higher.  Asian bonds played catch-up after yesterday’s strong advance in Europe and the US.  Benchmark 10-year yields in Europe are off another 2-3 bp.  Gilts continue to outperform.  In response to buying about GBP52 mln less of the 7-15-year bucket than it wanted to yesterday, the BOE indicated today that it would simply add it back into the second half of the program, the details of which it will announce in November.  

On Monday, dealers offered 3.6x more short-term bonds (3-7 year duration) than the BOE wanted to buy.  Yesterday, however, dealers did not offer the full amount.  Today’s reverse auction for GBP1.17 bln 15-year+ bonds will be closely watched.  Owners of those longer-term bonds may be reluctant to part with them because it is difficult to replace those yields.  The UK 10-year bond yield is off 5 bp today to 0.53%.  A week ago it was yielding 0.82%, and on the eve of the referendum, it was 1.30%.  The 15-year yield is off 5 bp to 0.97%.  

In the Quarterly Inflation Report, the BOE argued that while monetary policy could cushion the economic impact, it was limited.  It seemed like it was a call for fiscal support.  Today’s BOE Agents (~270 business contacts surveyed from late-June through late-July) survey found what other surveys have reported.  Business services growth has softened, and consumer spending has slowed.  Commercial real estate was “materially affected” by the Brexit decision.  Would it be too much like helicopter money for the UK government to have a small fiscal stimulus program and fund it with long-dated Gilts?

Beginning with last week’s stronger than expected increase in cash wages, Japan’s data has been surprising to the upside.  Today it was June machine orders, a volatile series to be sure.  They jumped 8.3%, more than twice the gain anticipated by the median guesstimate.   Separately, Japan reported that producer prices were flat last month.  It may not sound impressive, but it is only the second month since May 2015 that producer prices did not fall.  

After spending yesterday inside Monday’s range, the dollar was sold in Asia and the European morning.  It has seemed to carve out a shelf in the second half of last week in the JPY100.70-JPY100.85 area, which appears set to be retested.

There are three other developments to note.  First, RBA Governor Stevens, who is set to retire, did not shed light on the immediate outlook for policy.  However, he said some things that will likely resonate with others.  He noted that monetary policy could not “simply dial-up” the desired growth level, and undershooting the inflation target while there is reasonable growth may be the “least bad option.”  Stevens, like Carney, appears more skeptical about negative rates than the ECB and BOJ.  

Second, stronger than expected Norwegian inflation has sent the krone sharply higher.  It is the strongest of the majors, gaining 1.25% against the dollar and 0.75% against the euro.  July was the second consecutive month that headline CPI rose 0.6%.  The median forecast was for a 0.1% decline.  The year-over-year rate rose to 4.4% from 3.7%.  The underlying rate rose 0.7% (median was flat) and 3.7% year-over-year.  This essentially takes the central bank out of the picture in terms of easing policy.  

Third, France reported dismal June industrial output figures.  The headline fell 0.8% after a 0.5% decline in May.  It is the third decline in four months.  The 1.3% year-over-year decline is the largest contraction since November 2014.  It was driven by a 1.2% drop in manufacturing output, which is the largest fall since July 2015.  The data warn of risk that the initial estimate of no growth in Q2 will be revised to show a small contraction.  

The Brazilian Senate voted late last night to continue with the impeachment process.  The margin was 59-21, but only a simple majority was needed.  PT officials had sought to delay the vote due to reports of an Odebrecht plea bargain that would implicate acting President Temer in accepting illegal campaign contributions.  After the trial, a final vote to impeach is expected in late August or early September.  Then, a two thirds vote (54-26) is needed, and last night’s vote suggests that recent political noise has not derailed impeachment.

Today, Brazil reports July IPCA inflation, which is expected to rise 8.66% y/y vs. 8.84% in June.  That would be the lowest since May 2015 but still well above the 2.5-6.5% target range.  Brazil also reports June GDP proxy and the first August preview of IGP-M wholesale inflation today.  COPOM next meets August 31, and no move is seen then given its hawkish stance.  Rather, rate cuts are likely to start at the meeting after that on October 19.

 

Some Corporate Bond Stuff

August 10th, 2016 7:21 am

Via Bloomberg:

IG CREDIT: Volume Higher Led by AGN, MSFT, MUFG
2016-08-10 10:01:10.291 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $16.2b vs $12.4b Monday, $17.3b the previous Tuesday.
10-DMA $15.2b; 10-Tuesday moving avg $16.6b.

* 144a trading added $2.1b of IG volume vs $1.5b on Monday,
$2.1b last Tuesday

* The most active issues:
* AGN 3.80% 2025 was 1st with client and affiliate flows
accounting for 87% of volume
* MSFT 3.70% 2046 was next with client and affiliate
trades taking 83% of volume; client selling 1.7x buying
* MUFG 2.95% 2021 was 3rd with client selling 6.5x buying
* DELL 6.02% 2026 was most active 144a issue with client flows
taking 59% of volume

* Bloomberg US IG Corporate Bond Index OAS at 147.0 vs 147.9
* 2016 high/low: 220.8, a new wide since Jan. 2012/146.7
* 2015 high/low: 182.1/129.6
* 2014 high/low: 144.7/102.3

* BofAML IG Master Index at +147, unchanged
* 2016 high/low: +221, the widest level since June
2012/+146
* 2015 high/low: +180/+129
* 2014 high/low: +151/+106, tightest spread since July
2007

* Standard & Poor’s Global Fixed Income Research IG Index at
+200 vs +197
* +262, the new wide going back to 2013, was seen
2/11/2016
* The widest spread recorded was +578 in Dec. 2008

* S&P HY spread at +596 vs +595; +947 seen Feb. 11 was the
widest spread since Oct. 2011
* All-time wide was +1,754 in Dec. 2008

* Markit CDX.IG.26 5Y Index at 74.9 vs 76.8
* 2016 high/low 124.7/70.0
* 124.7, a new wide since June 2012 was seen 2/11/2016
* 2014 high/low was 76.1/55.0, the low for 2014 and the
lowest level since Oct 2007

* Current market levels:
* 2Y 0.706%
* 10Y 1.537%
* Dow futures +8
* Oil $42.29
* ¥en 101.30

* U.S. IG BONDWRAP: August Surge Surpasses 2015 Monthly Total
* August volume hits $46.4b in just 3 days; YTD Volume $1.069t

Credit Pipeline

August 10th, 2016 7:10 am

Via Bloomberg:

IG CREDIT PIPELINE: 3 Expected to Price; STANLN Mandate Added
2016-08-10 09:36:06.540 GMT


By Robert Elson
(Bloomberg) — Expected to price today:

* Province of Alberta (ALTA) Aa1/AA, to price $bench 144a/Reg-
S 10Y, via managers CIBC/RBC/Sco/TD; guidance MS +68 area
* FMS Wertmanagement (FMSWER) Aaa/AAA, to price $bench Global
3Y, via BAML/C/JPM/RBC; revised guidance MS +8 area
* Royal Bank of Scotland (RBS) na/B/BB-, to price $bench
Perp/NC5 AT1, via C/DB/JPM/RBS/UBS; IPT 8.75% area


LATEST UPDATES

* Standard Chartered Bank (STANLN) Aa3/A, mandates
BAML/DB/GS/SG/UBS for 144a/Reg-S Perp/NC5 contingent
convertible AT1, 7% CET1 trigger; expected ratings Ba1/BB-
/BBB-
* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q


MANDATES/MEETINGS

* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19
* Woori Bank (WOORIB) A2/A-; mtgs July 11-20


M&A-RELATED

* Analog Devices (ADI) A3/BBB; ~$13.2b Linear Technology acq
* To raise nearly $7.3b debt for deal (July 26)
* Bayer (BAYNGR) A3/A-; said to review Monsanto (MON) A3/BBB+
accounts as bid weighed (Aug. 4)
* $63b financing said secured w/ $20b-$30b bonds seen
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Thermo Fisher (TMO) Baa3/BBB; ~$4.07b FEI acq
* $6.5b loans, including $2b bridge (July 4)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Air Liquide (AIFP) A3/A-; ~$13.2b Airgas acq
* Plans to refi $12b loan backing acq via USD/EUR debt
(June 3)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Shire (SHPLN) Baa3/BBB-; ~$35.5b Baxalta buy
* Closed $18b Baxalta acq loan (Feb 11)


SHELF FILINGS

* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)


OTHER

* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)
* Saudi Arabia (SAUDI); said to have hired 6 banks to lead
first intl bond sale (July 14)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* GE (GE) A3/AA-; may issue despite no deals this yr (June 1)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)

Over Reliance on Monetary Policy

August 10th, 2016 12:21 am

Via Bloomberg:
RBA’s Stevens Urges Budget Fix, Says Monetary Policy Not Enough
Michael Heath
maheath1
August 9, 2016 — 11:13 PM EDT

Central bank governor delivers final official speech in Sydney
Says inflation target has flexibility to allow undershooting

 

Glenn Stevens, in his final speech at the Australian central bank’s helm, said the economy’s slowing trend growth rate will make repairing the budget difficult and more urgent, while restating his strong support for an inflation-targeting regime.

In an address Wednesday that ranged across his decade as Reserve Bank of Australia governor, Stevens repeated his view that monetary policy is unable to simply “dial up the growth we need” and reiterated his “serious reservations” about reliance on it across the world. Stevens also signaled that fiscal policy should be used to finance infrastructure that would be a useful adjunct to supporting growth.

“Challenges remain for Australia, not least sustaining a stronger growth outlook over the longer term,” Stevens, who steps down next month in favor of his deputy, Philip Lowe, said in the text of the speech delivered in Sydney. “More than adjustments to interest rates will be needed to secure that.”

The Reserve Bank of Australia has slashed interest rates to a record-low 1.5 percent in an almost five-year easing cycle to help the economy adjust to the unwinding of mining investment. It’s also sought to shield the economy — which has avoided a technical recession for a quarter of a century — from fallout from rates at zero or negative in places like Europe and Japan, which are also running bond-buying programs.
‘Return to Normal’

“The central banking community globally has found itself doing unprecedented things. We in Australia have done fewer such things, but we are connected to the world, and the effects of policies adopted elsewhere condition the policy choices available to us,” he said. “Moreover, the ‘return to normal’ at the global level looks like being a very, very slow process. And normal is a different place now.”

The governor noted that during his term, inflation had averaged the mid-point of its 2 percent to 3 percent target, and the 5.3 percent jobless average wasn’t far off technical full employment.

Stevens also used his final address to shine a light on fiscal policy, noting that at a time of weaker growth it was no surprise returning the budget to the black was proving tough. He said Australians were going to need to get serious about restraint.

 

“When specific ideas are proposed that will actually make a difference over the medium to long term, the conversation quickly shifts to rather narrow notions of ‘fairness,’ people look to their own positions, the interest groups all come out and the specific proposals often run into the sand,” he said. “If we think this rather other-worldly discussion will not have to give way to a more hard-nosed conversation, we are kidding ourselves.”
Household Debt

He also noted that while Australians are concerned about government debt, which stands at about 40 percent of GDP, they show less interest in gross household debt that’s three-times higher at 125 percent. He said the case for public borrowing to build investment assets that are long-lived and yield an economic return should not extend to day-to-day government spending.

Finally, the governor looked at policy frameworks that have failed due to their rigidity, like the gold standard and exchange rate pegs, and those that survive.

“Frameworks that have a degree of flexibility, that can bend with the circumstances but retain their essential integrity, like an aircraft wing in turbulence, stand a reasonable chance of coming through,” said Stevens, who is an amateur pilot. “I think the inflation target as we have operated it has the requisite degree of flexibility.”

He said a concern voiced is that the bank’s commitment to the target may see it do things with monetary policy as it tries to speed up inflation that might create more problems than they solve. He said the RBA board is “very conscious” of that possibility and has proceeded very carefully.

“If it were the case that undershooting the target for a period while achieving reasonable growth was the ‘least bad’ option available, the inflation targeting framework has the requisite degree of flexibility to allow such a course,” he said.

Pimco Bulks Up on Treasuries

August 9th, 2016 9:03 pm

Via Bloomberg:
Pimco Total Return Boosts Government Stake to Most in 25 Months
Wes Goodman
richwesgoodman
August 9, 2016 — 8:31 PM EDT

Pacific Investment Management Co.’s Total Return Fund increased its stake in government and related debt to 45.6 percent of assets as of the end of July, the highest level in 25 months.

The fund added to the position as benchmark U.S. 10-year note yields tumbled to a record low 1.318 percent on July 6 and then bounced back to end the month at 1.45 percent.

Total Return, based in Newport Beach, California, is the world’s biggest actively run bond fund with $86.8 billion in assets. Pimco publishes the holdings every month on its website.

Not Enough Bonds to Go Around

August 9th, 2016 10:40 am

Via Bloomberg:
U.K. Bonds Jump as Offers Fall Short of Target at BOE QE Auction
2016-08-09 14:23:46.210 GMT

By Anooja Debnath
(Bloomberg) — U.K. government bonds surged as the second
operation of the Bank of England’s expanded quantitative-easing
program saw it fail to buy enough gilts to reach its stated
goal.
The yield on 10- and 30-year bonds fell to records as the
BOE said it received offers to sell 1.118 billion pounds ($1.45
billion) of gilts due in more than 15 years, compared with a
target of 1.17 billion pounds. The central bank will “announce
its response to the shortfall in today’s uncovered operation at
9 a.m. tomorrow,” according to a statement.
“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. “It is a
bit of a surprise that this went uncovered in the first week of
the operation, goodness knows what happens next week.”
The yield on U.K. 30-year bonds fell six basis points, or
0.06 percentage point, to 1.38 percent as of 3:20 p.m. London
time, after touching a record-low of 1.37 percent. The 10-year
yield fell to as low as 0.563 percent.
In the first round of buying on Monday, investors offered
to sell 3.63 times the 1.17 billion pounds of gilts due between
three and seven years that the BOE was seeking.