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Massive jump in gilt futures reflects changing government policy

The announcement earlier this week that the Bank of England has up to £150 billion available to acquire government bonds and financial assets in the open market has created quite a stir in the gilt futures market. Since the announcement was made we have seen a substantial rise in investor interest in the sector and prices have risen substantially. But why are investors so keen on gilts?

Quite simply the Bank of England has committed itself to acquiring large tranches of government bonds over the next three months, and possibly longer, which has effectively wiped out sellers in the sector and brought in a whole host of buyers. This has pushed prices higher and higher with the knowledge that the Bank of England will effectively indiscriminately acquire gilts in the marketplace irrespective of the underlying price. Many people believe this will place a substantial floor under the gilt market for the foreseeable future as investors await the Bank of England's much publicised buyback programme.

In many ways the authorities have "shot themselves in the foot" by releasing details of the aforementioned quantitative easing policy but in reality they had no choice but to indicate to the markets exactly what was going on.

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