It’s still early days in the UK’s QE process, so the 7 data points we have from the gilt buyback programme to date are insufficient to draw too many conclusions from.  However, this chart does seem to show that participation in the reverse auctions has been declining.  The first 3 auctions had an average cover of 5.3 times – so for every gilt that the Bank bought back, there was over 5 times that amount offered.  The last 3 auctions had an average cover of just 1.56 times.  What’s more, the most recent buyback saw the Bank pay a healthy premium to the prevailing market prices. 

It’s possible that the "looser" holders of gilts (hedge funds, investment banks, market makers) have now got out of their positions, having made some profits by buying gilts ahead of, and immediately after, the Bank’s QE announcement.  The next wave of gilts might prove to be harder to dislodge.  These are the gilts owned by "real money" accounts, including pension funds and mutual funds.  I run a gilt fund, what am I going to do if I sell my gilts to the Bank?  I have to own the asset class.   What’s more, isn’t QE the game that pays you not to play?  The Bank wants to get gilt yields down substantially, so if I sell my gilts to them a little above the prevailing market, doesn’t the market move up to that level straight away, and then higher again at the next buyback?  Paul Fisher of the Bank of England said that they are not price sensitive, and given that they are not even a third of the way through the first wave of buybacks (they will have bought back £25 bn of gilts by the end of next week), the next £50 billion of "sticky" gilts might come out at higher and higher levels.

A final thought – why have the £75 billion "quantity" target for purchases of gilts?  Wouldn’t a statement that the Bank of England is going to buy gilts back in order to target 10 year gilt yields at, say 2% (they are currently 3.36%), cause the market to move there without the need for many purchases at all?  And if they want to still pump the £75 bn into the market, both a quantity and level target might be a more powerful dual mechanism.