The Gilts Thread

[babesagainstmachines]

10-Year UK 111.76 3.32

10-Year German 103.75 2.57

10-Year US 105.156 2.90

Yields still falling, spread between UK and German debt falling

[Fairies Wear Boots]

So what you are saying is that UK gilts are becoming more pricey and desirable. UK gilts, a safe haven.

[lowrentyieldmakessense(honest!)]

So what you are saying is that UK gilts are becoming more pricey and desirable. UK gilts, a safe haven.

short term

[Sour Mash]

Great to see this thread back ...

Anyway, I can't believe the naivety of anyone 'investing' in a longer term Gilt (or any Western govt bond).

I can see the attraction of going to 'cash' (or the nearest usable equivalent in the world of global finance) for the short term as the markets head south again but once the printing starts, bonds bought now won't be worth jack. Aside from things like pension funds who can only invest in AAA rated things like Gilts, who on earth would loan money to the UK govt for a decade at such paltry interest rates?

[scepticus]

the printing has started,and yet,we still face deflationary pressures?what's going on?

you should know the answer to that by now.

[Sour Mash]

the printing has started,and yet,we still face deflationary pressures?what's going on?

No, the first batch of printing started and then stopped.

They gave it some time and now that it has failed after having 'worked' for a while, get ready for a much larger wave on the basis that the first tranche wasn't enough. That's how massive inflation kicks off - relatively small amounts at first which provide relief (i.e. bailing asset holders and debtors out) ... and then demands for more and more as each wave of printing loses its effectiveness. Like a junkie building up a tolerance for a drug needing more and more until they o/d.

Anyone sinking cash into a 10 year bond right now with a yield of around 3% is a fool. By all means park cash in the short term bonds though, much safer than leaving it in a bank as I'm sure we'll start to see tremors in the financial system again. Interbank rates have been on the way up for a while now, the bankers know how dodgy their peers are.

[MinceBalls]

I was indeed posting rhetorically

give us a clue

[Guest Steve Cook]

the printing has started,and yet,we still face deflationary pressures?what's going on?

The whole that the printing is trying to fill is biblically large

[scepticus]

The whole that the printing is trying to fill is biblically large

the printing is not trying to fill a hole, it is trying to persuade everyone else to fill it.

[sharpe]

the printing is not trying to fill a hole, it is trying to persuade everyone else to fill it.

How many trillions have been printed directly so far? How many after going through the banking system?

[scepticus]

How many trillions have been printed directly so far? How many after going through the banking system?

the banking system is not going to multiply them.

borrowers request the banking system to create money.

The banking system does not multiply money on its own.

we are past peak spending in the west.

only chinese, vietnamese, indonesians and uzbeks etc can now plausibly request that the global banking system manufacture of new money.

if they do so, then we are saved, but our interest rates will stay near zero just like the jap rates did even when the rest of the world was binging.

think of it as payback for three centuries of gunboat diplomacy.

[Injin]

the banking system is not going to multiply them.

borrowers request the banking system to create money.

No they don't.

Borrowers request that the bank give them existing money (and by definition existing resources.)

The banking system does not multiply money on its own.

we are past peak spending in the west.

only chinese, vietnamese, indonesians and uzbeks etc can now plausibly request that the global banking system manufacture of new money.

if they do so, then we are saved, but our interest rates will stay near zero just like the jap rates did even when the rest of the world was binging.

think of it as payback for three centuries of gunboat diplomacy.

Forget about it.

The probem is simple -

The banks have told everyone that there is 30x more resources than there are by the simple mechanism of misusing the word "savings." Now people in the general population are trying to draw on their "savings" and are experiencing a madcap note of confusion as "savings" to Joe Public means "pile of existing stuff I just go and dip into" and the fact that there is nothing there is a total head******.

So the bankers print, to nominally pay everybody off. Reeaaally simple. So simple that almost no one can believe it, in fact.

ideally of course the banksters would like to have the "savings" wiped out but keep the debts flowing their way.

[jaseywasey]

Sorry if this has been asked before but.....

What I dont understand concerning foreign investors buying Gilts.....surely they are primarily just betting on the exchange rates, with any interest paid as a bonus

In the last 10 years the pound has fluctuated from around Euro 1.70 - 1.02

And in the last 3 the pound/dollar rate has been as low as $1.37 and as high as $2.11

How can any investor care whether they are getting a fraction of a percentage point better, when the pound has fluctuated so violently?

[the_duke_of_hazzard]

Sorry if this has been asked before but.....

What I dont understand concerning foreign investors buying Gilts.....surely they are primarily just betting on the exchange rates, with any interest paid as a bonus

In the last 10 years the pound has fluctuated from around Euro 1.70 - 1.02

And in the last 3 the pound/dollar rate has been as low as $1.37 and as high as $2.11

How can any investor care whether they are getting a fraction of a percentage point better, when the pound has fluctuated so violently?

Possibly a naive/misplaced/wrong point, but if thee foreign investor has long-term liabilities priced in sterling then it would make sense wouldn't it?

[ParticleMan]

How can any investor care whether they are getting a fraction of a percentage point better, when the pound has fluctuated so violently?

Currency has no coupon (and no maturity for that matter).

Gilt investors are typically seeking to match liquidity requirements to maturity as finely as possible (holding all the cash needed for an expense further than three months out is a remarkably innefficient way to use capital, and the market will punish you for this).

They may also take Fx exposure (think about what happens if you borrow currency and buy a gilt).

[LuckyOne]

Sorry if this has been asked before but.....

What I dont understand concerning foreign investors buying Gilts.....surely they are primarily just betting on the exchange rates, with any interest paid as a bonus

In the last 10 years the pound has fluctuated from around Euro 1.70 - 1.02

And in the last 3 the pound/dollar rate has been as low as $1.37 and as high as $2.11

How can any investor care whether they are getting a fraction of a percentage point better, when the pound has fluctuated so violently?

Retail investors tend to take currency exposure and are willing to roll it over for as long as it takes for them to make a profit.

Wholesale investors tend to either buy on margin (against a Sterling loan so they have no net currency exposure) or on an asset swapped basis (using those nasty, socially useless derivatives) to isolate their currency exposure more accurately than a simple margin purchase.

States that insist on closing down the derivatives market (or indeed making it fully marginable for all users) are running a severe funding risk if they prevent investors from managing credit, interest rate or currency risk in an efficient manner. It will take time for this unintended consequence to reveal itself by which time it may well be too late.

[LuckyOne]

Possibly a naive/misplaced/wrong point, but if thee foreign investor has long-term liabilities priced in sterling then it would make sense wouldn't it?

That would be a quite specific but not that frequent situation.

In more general terms, the duration of pension funds and insurance companies are very long term. Derivatives allow them to snatch up duration that they need without taking on currency (or credit if they so choose) exposure.

[ParticleMan]

It will take time for this unintended consequence to reveal itself by which time it may well be too late.

It has roughly the same systemic effect as "losing" a generation's worth of savings down the pier.

Greenspan made the point that these structures allow the concentration of what little savings (in your terms - stock) there is in the West.

Unwinding these systems amounts to a sizeable negative net flow about the instant, and thereafter a large negative change to stock.

I don't think it'll take long to show up at all - those presently hell-bent on auto-emasculation will find themselves unable to break free of this recessionary half and will endure as the Japanese have.

[LuckyOne]

It has roughly the same systemic effect as "losing" a generation's worth of savings down the pier.

Greenspan made the point that these structures allow the concentration of what little savings (in your terms - stock) there is in the West.

Unwinding these systems amounts to a sizeable negative net flow about the instant, and thereafter a large negative change to stock.

I don't think it'll take long to show up at all - those presently hell-bent on auto-emasculation will find themselves unable to break free of this recessionary half and will endure as the Japanese have.

One of the lessons that I learned living in Japan is that a state cannot regulate itself to prosperity.

Having a resolution mechanism and a national will to deal with failed organisations is critical.

[ParticleMan]

Having a resolution mechanism and a national will to deal with failed organisations is critical.

Quite.

In this case low savings rates leave us with extreme skew in terms of extreme dispersion of private capital.

If we remove the foundations holding this castle in the air, we'll certainly get where we're all going that much more quickly...

The back of my barmat and I agree that if this populism (for that's what it is) is pursued to its logical end, the lack of growth* in national output should start to bite roughtly about the same time as the size of the nonproductive population in the economy begins to exceed the productive.

On the plus side it should ease some of the pressures on energy supply.

(* growth obviously depends on continually efficient reallocation of capital from nonproductive to productive sectors which in this context is a whole slab of whoop-ass about to be openned)

[proprlyst]

Quite.

In this case low savings rates leave us with extreme skew in terms of extreme dispersion of private capital.

If we remove the foundations holding this castle in the air, we'll certainly get where we're all going that much more quickly...

The back of my barmat and I agree that if this populism (for that's what it is) is pursued to its logical end, the lack of growth* in national output should start to bite roughtly about the same time as the size of the nonproductive population in the economy begins to exceed the productive.

On the plus side it should ease some of the pressures on energy supply.

(* growth obviously depends on continually efficient reallocation of capital from nonproductive to productive sectors which in this context is a whole slab of whoop-ass about to be openned)

Great time to look at yields since they can provide some indication of how the market assesses risk. Also yield spreads can provide an indication as to the direction of house prices. More charts http://wp.me/pTU04-2E

[david m]

Sorry if this has been asked before but.....

What I dont understand concerning foreign investors buying Gilts.....surely they are primarily just betting on the exchange rates, with any interest paid as a bonus

In the last 10 years the pound has fluctuated from around Euro 1.70 - 1.02

And in the last 3 the pound/dollar rate has been as low as $1.37 and as high as $2.11

How can any investor care whether they are getting a fraction of a percentage point better, when the pound has fluctuated so violently?

Whether an investor takes on fx exposure when buying a givernment bond typically depends on what type of investor they are.

A foreign hedge fund or prop desk will usually buy a gilt and repo it back or do an fx forward. They take interest rate risk but no fx exposure (except on their profits/losses). Most hedge funds/prop desks would explicitly separate an interest rate view from an FX view.

A foreign real money institutional investor (pension funds/investment fund etc) may take the exposure fx hedged or fx unhedged. If fx hedged they will either repo back the bonds or more often execute an fx forward to offset the risk. The decision to fx hedge or not may be decided by their view and/or their mandate (for example they may be indexed against something like the JPM Govt Bond Index (FX hedged) or JPM Govt Bond Index (FX unhedged)).

When a foreign retail investor, say a Japenese Iridashi fund, buys a 10-year UK Gilt, they will normally buy fx unhedged. Since they are usually buy-and -hold investors they are essentially taking a view on the 10-year GBP/JPY forward outright exchange rate (plus qite a bit of asset swap and credit risk).

In recent years, FX rates have been more volatile than government bond yields. Remember that wasn't always the case and is mainly due to govt bond yields being much lower over the past 10y. Also remember than when a 10-year Gilt yield moves by 50bps (quite normal recently) the investor will make/lose around 4% (assuming duration about 8) which is still not insignificant.

Edited July 4, 2010 by david m

[ParticleMan]

In recent years, FX rates have been more volatile than government bond yields. Remember that wasn't always the case and is mainly due to govt bond yields being much lower over the past 10y.

I'll stick my neck out and say it's more due to a rise in liquidity (in more than one dimension, both in terms of the liquidity added by market makers, and, in terms of extending more leverage to a broader cross section of participants) unmatched by a corresponding rise in transparency.

The Fx venues (compared to their counterparts in FI and futures) are atrocious (those who operate them seem perfectly happy to keep it that way).

[babesagainstmachines]

The 10 yr Gilt has hit 3% today. Hyperinflation here we come.

[Panda]

The 10 yr Gilt has hit 3% today. Hyperinflation here we come.

When it hits/IF it hits 5% then we are looking at problems, but that sounds about right, current wage settlements around 2%, if you are lucky 3% per year over three years.

I wonder what will happen when the yanks stop buying our bonds, well if.............................and we stop buying theirs.................?