The Bank of England's new bond-buying programme ran into trouble on its second day of operations on Tuesday, as pension funds and insurance companies struggling with a deepening funding crisis refused to sell gilts to the central bank.
Investors rejected the BoE's attempt to buy £1.17bn of long-dated government bonds in spite of receiving prices significantly above market levels and offered to sell just £1.12bn.
Last week, BoE governor Mark Carney unveiled a comprehensive package of monetary-easing measures designed to cushion the economy from an anticipated downturn following the UK's vote to quit the EU. It surprised financial markets by its breadth and led to a further collapse in government bond yields as investors bet on years of economic stimulus.
The auction shortfall triggered a sharp drop in gilt yields as investors questioned whether the BoE would find enough willing sellers to complete the revived £70bn quantitative easing scheme.
"The fact that their first attempt to buy long-dated gilts has failed raises significant question marks," said Mitul Patel, head of interest rates at Henderson Global Investors.
BoE officials are confident future auctions will be covered in full and pointed out that the shortfall was small and that trading in markets is thin in August. A statement will be released at 9am on Wednesday morning.