The latest round of quantitative easing (QE) measures by the Bank of England led to a flattening in the UK yield curve, with the long end outperforming the short and medium part of the curve.
In addition, yields on some short-dated Gilts fell to zero or negative levels, according to Investec bond strategist, Shilen Shah. Shah commented: “As with German and Japanese government bond markets, a number of investors are willing to accept a negative guaranteed return in the hope yields fall further into negative territory.”
Shah added that significant differences in investor behaviour across the yield curve are noticeable. “At the short end and the medium part of the curve, investors are more yield sensitive. In contrast at the long end of the curve, liability-driven investors such as pension funds dominate the market,” Shah commented. This was shown by a reverse auction held by the Bank of England which targeted the 15 years-plus part of the Gilt market and was undersubscribed by £52 million. Shah said this highlighted the factor that a number of investors at the long end of the curve are price insensitive and unwilling to sell their Gilt holdings. This is due to the fact that investors adopting an LDI approach have very limited alternatives to long-dated Gilts as a matching asset for liabilities. The Bank of England is expected to make up for shortages in its asset purchases at the long end of the Gilt curve by purchases in the medium-term, seven to 15 year maturity band of the Gilts market, where potential sellers are more yield sensitive and have more options for investing elsewhere.