Picture the scene. It is referendum day and officials from the Bank of England and the Debt Management Office are meeting to discuss contingency plans for if the UK votes to leave the EU.
They agree there are likely to be problems in the “gilts” (government bonds) market in the event that the opinion polls have got it wrong in predicting a yes vote. Once again the pollsters end up with egg on their faces and – as expected – gilts become an issue.
But not in the expected manner. It had been anticipated that the government would have difficulties selling gilts given the referendum result, political turmoil and the size of the UK’s budget deficit. Instead, gilts – especially those with long maturities – have become prized and it has been hard to persuade investors to part with them.
The Bank needs to buy gilts as part of its post-Brexit stimulus package. Threadneedle Street wants to buy £60bn of UK government bonds and exchange them for cash, but ran into trouble last week when it failed to find enough sellers of long-dated gilts with a maturity of 15 years or more.
This week things went more smoothly. The Bank had offers from willing sellers worth 2.67 times the amount of bonds it wanted to buy, and managed at a slight discount to where they had been trading in the market.
Investors still got a higher price than they could have envisaged a couple of months ago, and their reluctance to sell means the reverse gilts auction will become a bit of a soap opera. But make no mistake: the government would rather be having trouble buying bonds than having trouble selling them.
