Gilts Yields Hit New Highs Even As BOE Expands Quantitative Easing

Who Still Thinks that Quantitative Easing Can Flatten the Yield Curve?

The Bank of England yesterday announced that they would increase Gilt purchases by a further 50bln Sterling on top of the original 75bln Sterling. Despite this Gilt yields rose yesterday to levels that were higher than before the Bank of England’s (BOE’s) quantitative easing experiment started. The huge worldwide issuance of bond,s including the gigantic supply being issued by the UK Treasury, is increasingly leading to indigestion. Meanwhile both inflation expectations and real yields are rising as risk aversion wanes. Central banks have to decide will they target monetary aggregates/inflation or the shape of the yield curve? They can not control two different targets with one policy instrument. The only way to get the yield curve to flatten is to inject far too much high-powered money. If they do this, they risk an inflationary spiral. If they target an appropriate level of monetary aggregates, they risk a sharp rise in long-term yields which may choke off any incipient global recovery. The Bank of England by acting so aggressively may be leaning toward trying to control the shape of the curve. Mr. Market is telling them it will take much larger government debt purchases to accomplish this.