Thursday, Jan 07, 2010
I wonder how many of the traders were buying on behalf of BOE?
Telegraph: UK gilts sale sees 'good demand'
''Britain sold £4bn worth of five-year gilts in a sale of 2015 bonds that saw "good demand" according to traders. ''
Posted by hpwatcher @ 10:14 AM (1414 views) Add Comment
23 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. growler said...
they were 5 year, reasonably high yield - pretty safe - and about 2% of the years worth of debt to sell. And the market thinks the Labour Government will be shown the door at Walpurgisnacht. How I love the irony that Jack Staws 16 weeks is the end of April.
2. matt_the_hat said...
Why is the journalism in this country so poor. I read articles like this and they consistanly fail to answer basic questions related to the topic- were these gilts inflation linked?
3. mrflibble said...
Excellent, so Merv will be able to shut down the printing press for good then? Lets see what is announced today at noon...
4. matt_the_hat said...
I read somewhere that 80% of gilts issued are inflation linked - therefore theoretically stopping the government from inflating away the debt.
An interesting question that some on here maybe able to answer, is the BOE buying up a greater share of these inflation linked gilts? and are the government reducing the weighting of inflation linked ones in the new issues??
5. mountain goat said...
@ Matt_the_hat - the governments good reputation as a borrower is one of its most highly prized assets. For short-term thinking politicians it's not the debt that kills you but your ability to borrow more. The markets expect and tolerate low inflation, it's priced in. But high inflation or more GBP devaluation would break the trust of investors. So high inflation is unlikely because the government needs to maintain it's reputation. And those who think devaluing GBP was such a great idea (if the BoE has any control on this anyway) should realize that it hurt the UK government reputation as a borrower. So I don't expect them to offend bond investors if they can help it and personally I trust short-term bonds (up to 5-year) as safer than money in the dodgy banks.
PS having lived in a few other countries I would say the journalism in this country is about as good as it gets.
6. fallingbuzzard said...
25% of outstanding gilts are inflation linked, couple of years ago it was nearer 35%. The rest of the hidden debt is pension liabilities and other stupidly entered into inflation-linked stuff like PFI initiatives.
The BOE isn't buying back a greater share of the inflation linkers, I don't think they've bought back any in fact, given that investors want to hold onto them.
No, the DMO is issuing just as many inflation linked gilts as it has over the past few years. Investors would like more, especially very long dated ones. Thats where they will have an auction failure, if one occurs. Like next week's auction, 40 year gilt with 4.25% coupon. Yesterday's auction couldn't fail.
7. nickb said...
But selling bonds to finance government spending has no effect on the economy; all it does is displace private sector spending by the pensions funds etc that buy the bonds. and increasing national debt. What is the point?
8. flashman said...
matt: The UK was one of the first to issue index linked gilts/bonds (back in the 80's I think) but they still only make up a bit more than a fifth of UK government gilts issued. UK gilts are linked to RPI, which is different to the system used by US linked gilts/bonds. The industry word for these gilts is "linkers" so you might be better off using that word if you want to look into them.
The ones you are asking about had a coupon of 2.75% and were not linkers
9. fallingbuzzard said...
@nickb, The point is to keep the price inflation "tax" running at 2%.
10. mountain goat said...
Rarely in my years covering Gilts have I seen so much ill-informed opinion expressed in the media about the success of yesterday’s 2.75% 2015 auction. So much of the comment focuses on how it flew in the face of the negative Gilt views expressed by the likes of PIMCO, BlackRock and Standard Life, to mention but a few.
The truth about the demand was as we suggested yesterday:
a) bank capital balance sheet demand
b) it’s a sub-par 5-year bond, with a yield of 3.0%, it was very cheap to its peer group, and given the steepness at the front of the curve, it is THE ideal Gilt for the old principle of using ultra low short-term rates and a steep curve to re-capitalize the banking sector in times of financial sector distress. Oh and by the way it’s also the new 5-yr benchmark (doh!)
c) the added bonus for GEMMs of being able to offload a large amount of the stock that they would have had to buy from end investors and specs switching into the 2.755 2015 was more than well evidenced by the 3.92X cover ratio at the afternoon 3-10 yr QE auction, where all but £42 Mln of the £1.7 Bln that the BoE bought was in the stocks immediately surrounding (2013-2015) the auction stock.
d) Other than for their ultra short funds, this is not really an area that commercial fund managers are buyers of, while most pension fund managers have duration index targets of 15yrs plus, so this was not one for them either.
e) Take a look at the attached Gilt deviations sheet, and the the way that the Gilt curve between 5 and 50 years steepened by 6 bps yesterday, and now tell me whether these long term fund managers are enthusiastic about long-dated Gilt yields – I think NOT!
The real test of demand for gilts is now widely expected to come next Wednesday, with the £2.25bn 4.25 per cent 2049 auction. That particular offering has fewer of the supportive traits of this week’s one....
FT Alphaville
11. flashman said...
Pension funds and insurers will be the main buyers for the 2049. Last April the 2049 was five or six times oversubscribed. There is currently no panic about the likely outcome but I doubt it will be oversubscribed to the same extent
12. hpwatcher said...
In any event, the UK fundamentals are terrible!
13. icarus said...
Anyone know why the gov't doesn't issue more index-linked gilts? Say 40%+ of the total. Pension funds like them and It would reassure markets that the gov't isn't going to inflate away its debts, thereby keeping downward pressure on yields and possibly lowering risk premia on all kinds of gov't debt.
14. fallingbuzzard said...
I think the last auction of 2049 had a cover of just over two, not five or six times. it's not a question of failure, but a question of what the price of success will be. 4.6% last time.
15. flashman said...
hello icarus: index linked gilts are not always popular because the initial coupon is very low and their spec and profile does not always suit the requirements of big buyers. The larger initial coupon on the non-liked gilts is more attractive to most buyers
16. icarus said...
Hello and thanks Flashman.
17. fallingbuzzard said...
@icarus. I would add that the markets already know that the government can't inflate away its debt because of its pension and other liabilities. It just can't be done. What the market doesn't know is whether or not the UK can definitively avoid deflation. And linkers lose capital on deflation. Add to that the dodgy nature of ONS stats and the fact that linkers return well during high inflation, at which point default would become an issue for the UK.
18. matt_the_hat said...
who in their right mind would by a bond at 2.75% for five years in a currency that has devalued by 30% - probably the trustees of my pension :-(
19. matt_the_hat said...
17. fallingbuzzard - ok the government can't inflate the debt away overnight - but the main idea is about who has the information on money supply (real inflation). If the government just deceives everyone by 1-2% a year then the national debt is paid off by inflation tax. Is this not the game that governments around the world try to do all the time. It would be interesting to calculate the ONS estimates for inflation each year vs the real demise of purchasing power of the pound - I bet a bias would be uncovered!
20. nickb said...
@fallingbuzzard at 9
If it doesn't affect economic activity (the volume of transactions in the economy) it can't cause inflation.
21. icarus said...
Thanks fallingbuzzard 17. I suppose in a way my q @13 was a silly one. The answer is supply and demand. Regarding deflation, for example, the cost of linkers to the gov't is reduced - but this is a loss to the buyers.
22. fallingbuzzard said...
@20, without it, money supply would be contracting
23. nickb said...
@22
Am I missing something obvious? The government sells a bond to a pension fund. the pension fund buys it with purchasing power that would otherwise be used elsewhere. The government's purchasing power has increased and the pension fund's decreased, by the same amount. Where is the inflationary effect?