The Gilts Thread

[scepticus]

Super info.

It almost sounds like the national debt is insufficient to meet demand for saving from the private sector.

I mean, can't these people find somewhere to park their savings in the private sector?

[Mugwump Boy]

We've just had a weird result in today's reverse gilts auction in which the BoE was buying £1.4bn of long-dated gilts under its QE programme.

Thanks for all these updates FT, this is easily the best thread on HPC.

[FreeTrader]

Thanks for all these updates FT, this is easily the best thread on HPC.

Thanks for the thanks MB, and the same goes for comments others have made. I don't usually reply to them, but that doesn't mean they're not appreciated.

[babesagainstmachines]

The cover at the auction was just 1.13, by far the lowest at any QE auction so far. Unlike a DMO auction where a low cover is considered bad and gilts would normally weaken, at a reverse auction a lower cover is normally bullish. It means that despite the BoE going in with an open chequebook, not many holders were willing to sell. The bank came close to not being able to purchase the full quota.

Were they index linked issues ?

[Injin]

Super info.

It almost sounds like the national debt is insufficient to meet demand for saving from the private sector.

I mean, can't these people find somewhere to park their savings in the private sector?

Savings?

They are gonna start mailing cheques to the general population.

[FreeTrader]

Were they index linked issues ?

No, they were all conventional gilts with maturities ranging from 2036 to 2055.

More than half of the £1.4bn went on the 2055 gilt (although the Bank didn't have much choice).

[Mr. Cholmondley-Warner]

So what is this all setting us up for? Trying to support the market with words because QE is going to end? Or do we need a lot more gilts to be issued to help alleviate the 'shortage'? Or should the BoE start buying assets other than gilts (e.g. newly issued MBS or special state loans) to give the market breathing space ?

Does this mean good news (relatively), bad news or none of the above?

Sorry meant to say also thanks for the thread, considered insightful discussion being generated, not as much of that round here nowadays

Edited October 27, 2009 by Unknown

[erat_forte]

Does this mean good news (relatively), bad news or none of the above?

Sorry meant to say also thanks for the thread, considered insightful discussion being generated, not as much of that round here nowadays

Always pleased when this thread gets bumped.

Looking forward to seeing the developments discussed here over the next week or so.

[FreeTrader]

Does this mean good news (relatively), bad news or none of the above?

I can't say what it means because I don't know what the BoE is planning.

All I'm saying for now is that I'm not convinced by this latest 'gilts famine' line. After all, it was only last week that we had the weakest demand at a DMO gilts auction since the failed auction in March, and as of yesterday gilt yields were still creeping up. So why wasn't this supposed famine being reflected in prices? Why suddenly today?

In nine days' time a lot of the mist is going to clear. This is going to be a very important MPC meeting, and things are far more nuanced than they were earlier in the year. When QE started in March sterling's effective exchange rate was much the same level as it is today, but you get the feeling that the currency is a great deal more vulnerable on the downside now than it was then. There isn't the same widespread support amongst economists/analysts for an extension to QE, and headline inflation is going to start rising soon. Consequently there's a greater risk of a policy error by the MPC that could have unforeseen destabilising repercussions in the markets.

[FreeTrader]

How things can change in a matter of days. Less than a couple of weeks ago a majority of economists were forecasting an end (or at least a pause) in the BoE's QE programme, but with the release of an unexpectedly bad Q3 GDP first estimate and UK money supply showing sluggish growth, the consensus has changed.

Most now believe that QE will be extended, and according to a latest poll by Bloomberg, the median forecast is for an additional £50bn of QE.

I'm not much into making short-term forecasts, but FWIW I'll stick to the view I expressed several weeks ago when I said I thought the BoE would extend QE by £25bn. Although the MPC now has cover for upping QE by £50bn (and we have to assume that this is at least partly already priced into sterling), the credibility of the Bank might suffer if headline inflation rises by more than expected into the new year, or if Q3 GDP is later revised upwards. This could put a great deal of pressure on sterling, and any sharp decline will only raise inflationary fears further.

From a gilts market perspective, £25bn would tidily wind down the BoE's intervention, allowing it to buy roughly £2bn gilts each week between now and February's meeting. £50bn would be more difficult for the market to absorb, and if we do get that figure then don't be surprised to see the Bank announce a widening of asset purchases beyond gilts.

The Asset Purchase Facility (APF) now owns 21.2% of all tradeable gilts. It owns 27.8% of conventional gilts and 35.6% of conventionals in the 2013-2055 maturity range. In the chart below, each bar represents the total available free float of each gilt that the BoE has been buying, and the red portion denotes the APF nominal holding. The blue section is therefore the amount available in the market. As you can see, the BoE has virtually cornered the supply of some gilts, although this will change as the DMO increases supply.

The second chart shows the yield on the 10-year gilt since the start of the year. Right now we're almost exactly where we were when QE started in early March. The yield has been range bound between 3% and 4% during this period, but more recently it's been in a tighter range of 3.4% to 3.8%.

This week we have two DMO auctions before Thursday's MPC announcement, with £4,750m of a 2015 gilt up for grabs tomorrow and £2,000m of 2034 on Wednesday. With QE now expected to increase, these auctions should go okay but you never know, investors may stay away in order to give the MPC that extra little bit of encouragement to keep the gravy train going.

[grumpy-old-man-returns]

Most now believe that QE will be extended, and according to a latest poll by Bloomberg, the median forecast is for an additional £50bn of QE.

edited. Good Luck FT.

Edited November 2, 2009 by grumpy-old-man-returns

[drunkincharge]

Most now believe that QE will be extended, and according to a latest poll by Bloomberg, the median forecast is for an additional £50bn of QE.

FT therefore is this now priced into the pound? the only reaction to come if the amount is greatly more or less than generally thought.

[moneyscam]

FT therefore is this now priced into the pound? the only reaction to come if the amount is greatly more or less than generally thought.

£50bn is mostly priced in. There will be a knee jerk sell-off in the pound. Then market will price in probability of this being end of QE and how quickly they will raise rates, so expect £ to strengthen near to medium term. Recent data like forward looking PMI as opposed to backward looking GDP has been positive so on balance the risks for £ lean towards the upside for this time period.

[FreeTrader]

FT therefore is this now priced into the pound? the only reaction to come if the amount is greatly more or less than generally thought.

I'll echo what moneyscam said above. Such widely-anticipated announcements are often greeted with a collective yawn once they're actually made public. It's later that it matters, particularly if new data conflict with the MPC's decision.

If there is going to be a market-mover though, it will likely be because the MPC decides to stick at £175bn.

[Number79]

I'll echo what moneyscam said above. Such widely-anticipated announcements are often greeted with a collective yawn once they're actually made public. It's later that it matters, particularly if new data conflict with the MPC's decision.

If there is going to be a market-mover though, it will likely be because the MPC decides to stick at £175bn.

so, if you were a betting man would your gut have you long or short sterling on thursday prior to the mpc anouncement?

[drunkincharge]

I'll echo what moneyscam said above. Such widely-anticipated announcements are often greeted with a collective yawn once they're actually made public. It's later that it matters, particularly if new data conflict with the MPC's decision.

If there is going to be a market-mover though, it will likely be because the MPC decides to stick at £175bn.

Thanks-great thread

[FreeTrader]

so, if you were a betting man would your gut have you long or short sterling on thursday prior to the mpc anouncement?

I'm not a betting man, especially with short-term currency movements.

If you put a gun to my head I'd go long. That's where the greatest potential for a post-announcement gap lies IMO.

(Seriously though, you'd be better off tossing a coin than asking me.)

[Number79]

I'm not a betting man, especially with short-term currency movements.

If you put a gun to my head I'd go long. That's where the greatest potential for a post-announcement gap lies IMO.

(Seriously though, you'd be better off tossing a coin than asking me.)

thanks. As you pointed out, the big market mover is likely to be an announcement that qe is not being extended and I short have thought that would cause a fall in sterling. It seems likely that there will be additional qe so long should be the obvious play but I can't help feeling that it is already baked in, maybe the actual figures will cause a move. Maybe I will just do the usual, watch which way the markets drive prior to 1200 and bet the opposite way

[FreeTrader]

thanks. As you pointed out, the big market mover is likely to be an announcement that qe is not being extended and I short have thought that would cause a fall in sterling. It seems likely that there will be additional qe so long should be the obvious play but I can't help feeling that it is already baked in, maybe the actual figures will cause a move. Maybe I will just do the usual, watch which way the markets drive prior to 1200 and bet the opposite way

Well, I'd see it the other way around Richy. If QE isn't extended then the assumption ought to be that the MPC has data indicating that either inflation is heading above expectations, or that the economy is pulling out of recession.

That in turn would indicate monetary tightening sooner rather than later, giving support to sterling.

[Number79]

Well, I'd see it the other way around Richy. If QE isn't extended then the assumption ought to be that the MPC has data indicating that either inflation is heading above expectations, or that the economy is pulling out of recession.

That in turn would indicate monetary tightening sooner rather than later, giving support to sterling.

that makes too much sense and is clearly the logical position. Does anyone trust the figures anymore and isn't there a lot of concern about qe being stopped too early?

[BearNecessities]

Simple question

Does the end of QE automatically mean that the ZIRP will also end.

What are the implications of no QE and ZIRP continuing?

[scepticus]

I'm loving all the bearish usernames

[FreeTrader]

Simple question

Does the end of QE automatically mean that the ZIRP will also end.

What are the implications of no QE and ZIRP continuing?

It would be a bombshell this week if the MPC decided to both end QE and raise rates. That could happen at a later date of course, but it's a remote possibility right now.

The implications of no QE + ZIRP depends on how the economy progresses over the coming months and also on whether the public sector borrowing requirement stays within the budget forecast. Even though short-term interest rates will be held down (as will rates on loans linked to Bank Rate e.g. tracker mortgages), medium and longer-term interest rates would likely start to move up if the economy shows more life or if we see consumer price pressures emerging.

Not extending the QE stimulus would therefore be seen by the markets as the start of monetary tightening. Perhaps the more interesting question is what happens after that – raising Bank Rate or reversing QE? From the various comments made by BoE staff a few months ago, it sounds as though they're thinking of raising rates before unwinding QE.

Incidentally, there was an interesting call from economist Peter Warburton when the IEA's Shadow Monetary Policy Committee met on 20th October (the SMPC is just a bunch of economists pulled together to mirror the official MPC and give their own opinion on monetary policy).

Warburton advocated raising Bank Rate to 1% with a bias to extending QE but lifting rates to 2% (his reasoning and the views of other SMPC members can be found on David Smith's blog). This is a pretty maverick outlook, but I've got a lot of time for Warburton. In 1999 he produced a seminal, prescient analysis of the abuses that were developing in credit markets.

The book he wrote – Debt & Delusion – Central Bank Follies That Threaten Economic Disaster – wasn't well received by his City peers as it told far too many home truths, and it quickly went out of print. About the only thing you can accuse him of is getting his timing wrong on how long the debt growth could be sustained.

I'll leave you with some of the chapter headings (bear in mind this was 10 years ago):

4. Banks Reproved and Re-invented

5. The Rise and Rise of the Financial Markets

7. Risk Markets and the Paradox of Financial Stability

8. The Illusion of Unlimited Savings

9. The Bloated Bond Markets

10. The Erosion of Credit Quality

12. The Separation of Financial Value from Economic Reality

13. Diminishing and Vanishing Returns to Debt

15. Borrowed Time ( <-- yep, we're still living on it)

[Toilet-Currency]

I have a queasy question for the esteemed readers of this thread- apologies if it has been addressed already.

We all tend to take with a pinch of salt the notion that the BofE is going to sell the gilts it has bought back to the secondary market at some point. So when a gilt that BofE holds comes to maturity, does that mean that

1) HM treasury pays the redemption to the BofE by raising the same amount via the DMO (or from a budget surplus )

and

2) the money supply contracts by £xbn (the nominal held by BofE)

Looking at the website, the first maturity is March 2013, currently £4.6bn held. So does M4 shrink by 4.6bn in 2013 unless they freshly quease the same amount at that time, or do some accounting jiggery pokery to net off with the redemption amount so govt pays 0 (effectively the same thing)? Maybe the term "QE jelly roll" will be entering the lexicon shortly.

There is £6bn falling due in 2013, £16bn in each of 2014 and 2015, which would not be trivial amounts to juggle or refinance (properly, without printer) in the coming parliament.

http://www.bankofengland.co.uk/markets/apf/gilts/apf-giltresults.xls

Edited November 3, 2009 by Toilet-Currency

[ccc]

I have a queasy question for the esteemed readers of this thread- apologies if it has been addressed already.

We all tend to take with a pinch of salt the notion that the BofE is going to sell the gilts it has bought back to the secondary market at some point. So when a gilt that BofE holds comes to maturity, does that mean that

1) HM treasury pays the redemption to the BofE by raising the same amount via the DMO (or from a budget surplus )

and

2) the money supply contracts by £xbn (the nominal held by BofE)

Looking at the website, the first maturity is March 2013, currently £4.6bn held. So does M4 shrink by 4.6bn in 2013 unless they freshly quease the same amount at that time, or do some accounting jiggery pokery to net off with the redemption amount so govt pays 0 (effectively the same thing)? Maybe the term "QE jelly roll" will be entering the lexicon shortly.

There is £6bn falling due in 2013, £16bn in each of 2014 and 2015, which would not be trivial amounts to juggle or refinance (properly, without printer) in the coming parliament.

http://www.bankofeng...giltresults.xls

I don't know too much about all this stuff. However the following headline I expect to see in the coming years:

"QE money 'written off' for good"

How, details, when ? No idea. Some jiggery pokery seems the best bet.