Bank of England to Make Up Bond-Purchasing Shortfall After Auction Hiccup

LONDON—The Bank of England said Wednesday it plans to make up a shortfall in its bond-purchase program later this year after it couldn’t find enough bonds to buy in a Tuesday auction, a hiccup that highlights the occasional challenges central banks face when shopping in financial markets.

The move came as U.K. government bond yields hit fresh lows Wednesday.

The central bank had revived its crisis-era bond-buying program on Thursday as part of a package of measures to support the economy in the wake of voters’ decision to exit the European Union. It said it would buy £60 billion ($78 billion) of U.K. government bonds, or gilts, over the next six months, a policy known as quantitative easing.

The aim is to drive down long-term interest rates and prod investors into riskier assets, making borrowing cheaper and easier for businesses and households.

In a sign the policy is gaining traction, U.K. government bond prices rose on Wednesday, driving yields lower. After falling below 0.6% Tuesday for the first time in history, yields on 10-year U.K. sovereign bonds had touched a new record-low of 0.511% by early-afternoon Wednesday.

The BOE’s first foray into the market in its latest round of QE went off Monday without a hitch but on Tuesday it said that it was only able to buy £1.12 billion of the £1.17 billion of the bonds it had hoped to scoop up. On Wednesday, it said the roughly £50 million shortfall would be made up in the second half of its six-month buying spree.

Bond-market participants said the snafu probably stemmed in part from a traditional mid-August lull in London’s financial markets, when bond dealers quit the city and trading thins out.

“August is notoriously illiquid,” said Daniel Loughney, fund manager at Alliance Bernstein, who is himself on vacation.

Some investors, though, said the BOE’s problem might reflect the nature of the bonds the BOE was trying to buy. The central bank holds auctions for bonds of different maturities on different days; on Tuesday it wanted to buy bonds maturing in 15 years or more.

Such bonds are highly prized by pension funds and other long-term investors, which covet them to match their future liabilities as they fall due.

“They are going to be less keen to sell,” said Séamus Mac Góráin, fund manager at JP Morgan Asset Management, adding that could make it “a bit harder” for the BOE to buy these types of bonds in future.

Still, analysts at Citigroup Inc. said the slowing U.K. economy means the government will probably have to borrow more than planned, increasing the supply of bonds available for investors to potentially sell on to the BOE. More issuance is already in the pipeline: The U.K. Debt Management Office, which handles gilt sales for the government, has another £27.3 billion of long-dated gilts to sell through the fiscal year to the end of March, according to its website. It will be selling debt maturing in 2055 next week.

Alan Clarke, director of fixed income research at Scotiabank, said he doubts the BOE’s mishap will be repeated. Dealers won’t have felt in any rush to sell in the first days of the six-month program, and prices will likely rise further as the BOE’s purchases get into full swing, he said.

“Why sell early on and miss out on the upside?” Mr. Clarke said.

A test will come next week, when the BOE will again seek to buy 15-year debt. The central bank is due Wednesday to buy gilts maturing between seven and 15 years. Results will be published later Wednesday.

The BOE’s bond-buying hitch comes as investors wonder whether the European Central Bank might be in danger of running out of some types of bonds to buy under its huge QE program, particularly those of some smaller eurozone nations. ECB officials have played down such concerns, pointing out that they have changed the rules that govern their purchases in the past.

The BOE’s revival of its QE program was accompanied by an interest-rate cut and a new funding program for banks. It also said it intends to buy some £10 billion of corporate bonds alongside its gilt purchases.

The central bank was reacting to what it sees as a darkening outlook for the U.K. economy following the Brexit vote. Officials said they expect growth to slow and inflation to rise amid the uncertainty caused by the surprise result.

The BOE’s network of regional agents said in a report Wednesday that their contacts in the business world expect the result to have a negative effect on investment, hiring and revenue in the coming year, although most said they don’t expect to shed staff or shelve spending in the short term.

Write to Jason Douglas at jason.douglas[a] and Jon Sindreu at jon.sindreu[a]