What happens if the Bank of England announces the end of QE? The fact that the idea has been in the news for months, and that everyone seems to be expecting that the programme will not be extended at this week’s meeting, suggests to me that the end of QE is already in the price of gilts.

And how much effect has QE had, anyway? Gilts are priced off US treasuries, and tend to move in the same direction. Will that come to an end when QE ends? Will the spread widen to the extent that the gilt and treasury markets actually move in different directions? It seems unlikely. Indeed, the opposite could be true: once the end of QE actually happens, and if the gilt market does not sell off, investors could become more comfortable about buying gilts, producing a rally. In addition, the market seems to have forgotten its latest fit of the vapours about inflation/rate hikes, and to be focussing on a “slow recovery” story; some commentators are talking about central bank rates staying flat until 2012. That should anchor the long end.

A counterargument may be: The BoE has bought a lot of gilts; if the spread to treasuries is exogenous, their purchases would push down treasury yields. A similar argument could be made for the Fed’s purchases of MBS.

Update: It seems there is scope for more spread widening than I thought. Here is a chart of the spread.