Banks buy majority of new gilts

2nd June 2011

Simon Ward , chief economist at Henderson Global investors, says in his Mindful Money blog: "The government has been able to continue to fund the large budget deficit at low interest rates in recent months because banks and building societies have stepped up gilt purchases, compensating for a reduction in demand from non-bank domestic investors and overseas residents…

"Banks are buying gilts partly under regulatory pressure but also because private sector demand for bank loans remains weak. Any revival in credit demand would probably slow the rate of purchases and put upward pressure on gilt yields. For the moment, banks are effectively delivering the QE2 stimulus sought by MPC arch-dove Adam Posen."

Mr Posen has made frequent calls for the UK to embark on a new round of stimulus for the economy and said last month that the injection of £50bn would help the recovery, reports the Daily Telegraph.

The increase in UK bank purchases of gilts has offset the fall in demand among overseas investors. In the six months to the end of October foreign buyers bought £33.5bn of gilts – but over the half year to the end of April this more than halved to £12.4bn. UK banks have traditionally been the largest buyers of gilts because of their need to match their large sterling liabilities with sterling assets.

StephenMarchant says on the Daily Telegraph report: "The PIIGS (Portugal, Italy, Ireland, Greece and Spain) are in a similar position as the commercial banks have been buying their Government bonds. This is happening to a lesser extent in other Euro nations and most rampant in the US where the Fed is buying Govt debt. 

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