Gilt yields are heading for new record lows, as are Eurozone peripheral yields, with the Italian 10-year preparing to follow Spain below 1.0%. Stock markets saw some profit taking after Tuesday’s rally. Italian and Spanish markets, which initially managed to carve out modest gains are now also in the red, but continue to outperform as indications about a marked slowdown in U.K. growth following the Brexit referendum and warnings on the fallout for Germany add to speculation of additional ECB easing in September.

The BoE’s failure to fully cover Tuesday’s reverse auction for long dated Gilts will also back warnings that central banks may run into supply constraints in its QE program and that Draghi may have to turn to buying stocks eventually. In the cash market the 10-year Bund yield is down -1.5 basis points at -0.097% and the Gilt yield down -5.0 basis points at 0.53%.

Capital Spending is Contracting According to BoE Report

The BoE’s Agents’ report shows that the Brexit vote is dampening capital spending, hiring and turnaround, with the report showing investment intentions in the manufacturing sector slowing to 0.2% from 0.4% in June and those in the services sector dropping to 0.4% from 1.1%. This followed Tuesday’s Niesr report, which suggested that the economy contracted in July and warned that there is an even chance of a technical recession. A report from Germany’s DIW institute, partly based on NIESR estimates, warned that in the EU Germany will be particularly hit by the fallout as export demand for German capital goods will drop.

The BoE said in a statement on the shortfall in Tuesday’s reverse auction that it will add the outstanding amount to the schedule for the second half of the QE program, with details to be announced on November 3. The BoE attempted to buy GBP 1.170 billion of long dated Gilts with maturities over 15 years, but only got offers of GBP 1.118 billion and was forced to accept bids above the market price. The failed auction helped to underpin Gilt futures and added to pressure on yields. Monday’s auction of shorter dated papers was well received, but at the long end the BoE is obviously meeting with some supply constraints, as chances of returns are higher and the market is less liquid, with British pension funds and insurers required to hold long dated papers.