For the first time since 2002, the UK Treasury was unable to sell all its government bonds in a government bond auction. The Treasury wanted to sell £1.75 billion of 40-year bonds. However, investors only bid for £1.63 billion as announced by the Debt Management Office. The bid-to-cover ratio, which is the number of bonds offered over the number of bonds sold, was at 0.93 compared to 1.0 in auctions in the last 7 years. As well, the consumer price index rose unexpectedly in February at an annual rate of 3.2% from 3.0% in January. The Bank of England has begun a policy of quantitative easing. More money will be created to buy government debt in order to inject a total of £75 billion of new money in to the English economy. Ultimately, the objective is no push down the cost of borrowing money.
The failure of the UK Treasury to sell all its government bonds is a sign of decrease in demand which could be affected by many factors. In order to buy a bond, businesses must reduce the amount of money in its bank deposit; however, the businesses may be saving their money in preparation for the future if they expect their profits to decrease. The fact that the Consumer Price Index rose unexpectedly, may also have influenced the demand for government bonds. Inflation decreases the value of bonds as they pay a fixed interest rate over time. When government bonds are sold, the ability of the charter banks to lend money is decreased because the reserves of the chartered banks have been reduced. When the government bonds are not sold, more money is retained in the circulation. However, the government needs this money in order to carry out its plans to revive the economy and continue to meet its previous commitments.
The lack of demand for government bonds shows how worried the consumers are about the future economy. Many are trying to keep funds available so that the money can be used when they are needed. If that money is used to buy a bond, they the consumers can no longer use that money until the bond has matured. However, if consumers do not buy government bonds, then the government may not have enough to spend. As predicted by BBC’s business editor Robert Peston, the bond sales in 2010 may have to sell for £200 billion in order to fund the plans the government have organized to revive the economy. If the government does not have sufficient funds to continue their plans then the task of coming out of the recession may become more difficult.
1 comment:
During the global recession we are in and the lack of success in selling all of their government bonds, the Bank of England should consider buying back the government bonds from the public. When the bank of England buys back the government bonds from the public, they will return the money to the public in exchange for the bond. This means consumers will have more money to spend and more money will be in circulation, lending to increased consumption and increased employment. With more money flowing into the banks, they can also afford to drop their lending and mortgage rates to further encourage spending. To continue carry out the stimulus package/injection into the English economy, the Bank of England can borrow the money from foreign countries if they don’t have enough money supply. This way, more money is flowing through the banks, consumers, and businesses while the government continues to implement their stimulus plan to revive their faltering economy.
Jason Tong
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