Jeremy Warner: Printing money seems powerless to halt rise in gilt yields

May 8, 2009

Outlook No wonder the Bank of England is stepping up its programme of "quantitative easing" (QE). Proving the old stock market saying that it is better to travel in anticipation than actually to arrive, gilt yields fell precipitously ahead of the formal announcement of QE, under which the Bank of England is expanding the money supply by buying shed loads of gilt-edged stocks. But they have been rising steadily more or less ever since and after another surge yesterday, the yield on the benchmark 10-year gilt is now higher than before the programme began. The rise has been particularly acute since the Budget, which laid out in glorious Technicolor quite how shockingly large gilt issuance is going to be in future years.

We are not alone. The rout in US bond yields was even worse yesterday. But just think where yields would be without the gilt purchases being undertaken by the Bank. There must be a limit to investors' appetite for government debt, even in a world where there seems to be no appetite for just about any other asset class. Solvency regulation has also been set, sometimes it seems deliberately, so as to force pension funds and other institutional investors into gilts, but even so. Despite the Bank of England's best endeavours, the cost of money is going up, and the biggest loser is going to be the public purse. I fear the punishment of markets is only just beginning.