Bank of England cuts rates and buys bonds

Posted Mar 8th 2009 9:40AM by Connie Madon
Filed under: International Markets

In a startling move, the Bank of England cut interest rates to .5% and announced plans to buy 75 billion pounds of gilts (the British equivalent of the U.S. Treasury bond). Gilt prices rose sharply, especially longer term maturities.

This had the effect of changing the slope of the yield curve (longer term maturities gained ground over shorter term ones). The Bank of England initiated these moves in an effort to bring down medium- and long-term rates.

Such a move has the effect of monetizing the debt. Traders immediately saw this as causing weakness in the pound, Britain's currency. March sterling fell to $1.4041 on Friday against the dollar and to .8981 against the euro.

Markit's iTraxx Crossover Index fell by 2 basis points. The Crossover Index measures the cost to insure high-grade bonds against default. A fall of 2 basis points means that the cost to insure bonds over a five-year period has fallen 2,000 euros annually for 10 million euros of debt, a slight improvement.

Do you believe that the Federal Reserve will follow suit and buy U.S. Treasuries?

Tags: Bank of England, bonds, gilt, inthenews, Markits iTraxx Crossover Index