Who's selling gilts?

By Chris Dillow, 07 January 2010

It's not just the Bank of England that has been buying gilts. So too, overall, have institutional investors. Official figures (pdf) out yesterday show that, in the third quarter, these bought a net £8.2bn of UK government bonds. Within this total, insurance companies bought £3.9bn and pension funds £4.1bn.

The first theory they contradict is the notion of how quantitative easing (QE) is supposed to work. The theory was that investors would use the cash raised by selling gilts to buy UK company securities, which would give firms the finance that banks were withholding.

But this doesn't seem to have been the case, at least for institutional investors. Yes, insurance and pension funds did buy UK corporate bonds in Q3, and in Q2 for that matter. But they sold UK equities. Net, insurance and pension funds disinvested in UK companies in Q3.

Instead, they put their money overseas. Insurance companies bought £4.4bn of overseas corporate securities (bonds and equities) in Q3, and pension funds bought £1.6bn. These sectors also bought £6.4bn of index-linked gilts in the quarter; insofar as they sold some conventionals to the Bank, they recycled the cash into linkers.

The second theory that's contradicted is the idea that investors are taking fright at the UK government's debt mountain. Institutional investors, at least, are not doing this (yet?!). They have faith in the government; it's confidence in UK companies that they lack.

It doesn't, of course, follow from this that there won't be a big sell-off in gilts; it could instead be that institutional investors are plain wrong.

The numbers do, however, give us a puzzle; if institutional investors aren't selling gilts, who is? Let's pin down the numbers we have. In Q3, the Bank bought £96.4bn of gilts. The government's net issues in the quarter were £64.2bn (table 1.2C of Financial Statistics). So someone must have sold £32.2bn worth of government stock to them. Who?

It's not foreigners. Bank figures (table A3.2 of Bankstats) show that these actually bought £6.4bn. Figures from that table also show that the M4 private sector generally sold £2.3bn in Q3; this suggests that unit trusts and other private holders such as households dumped gilts. And figures elsewhere in Bankstats (table B1.2) show that banks added a few gilts as well.

Which leaves us the question: who is selling? I can only assume that it is that notorious black hole, banks' off-balance sheet entities.

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