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I thought that you were sat on lots of shiny metal ready for inflation, watching the spot reduce on a daily basis isn't much fun.

I am sat on some gold :rolleyes: , not a huge amount though.

edited - god that sounds pretentious (above). I have some gold, but I do not sit on it.

How could you be set up so that deflation suits other than being all cash?

I have pm'd you. ;)

Edited by grumpy-old-man-returns
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Investors' appetite for British government debt will be tested today with the first gilt sale of its kind in four years.

The Debt Management Office (DMO), the executive agency of the Treasury that manages sales of government bonds, is expected to raise up to £5 billion through the sale of 25-year gilts.

The sale will be syndicated. Barclays Capital, Goldman Sachs, HSBC and Royal Bank of Scotland will find buyers for the bonds. The DMO last sold debt in this way in 2005, with the sale of a 50-year inflation-linked gilt, but it is rare for gilts to be sold on a syndicated basis. Britain usually sells gilts through auctions.

http://business.timesonline.co.uk/tol/busi...icle6506753.ece

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The plan is to sell £13bn of long-dated conventional gilts, and £12bn of index-linked.

What were the sales today? One or the other or a mix of both?

And for that matter I understand the index linked ones but what are 'long-dated conventional gilts'

Thanks!

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What were the sales today? One or the other or a mix of both?

And for that matter I understand the index linked ones but what are 'long-dated conventional gilts'

The sale today was for a new conventional gilt. In the second half of July a new index-linked gilt will be syndicated with a maturity c. 30-40 years. Then in September there will be another index-linked syndication.

Conventional gilts are simply those that aren't index-linked. They pay a fixed coupon (amount of interest ) on the nominal amount issued, and that nominal amount will be repaid when the gilt matures.

For example, today's syndicated gilt is the 4.5% Treasury Gilt 2034. Until this gilt matures on 7 September 2034, the holder will receive two six-monthly interest payments of £2.25 for each £100 of nominal gilt held (paid in Sept and March). When the gilt is redeemed in 2034, that holder will receive £100 for each £100 nominal plus the final interest payment.

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The sale today was for a new conventional gilt. In the second half of July a new index-linked gilt will be syndicated with a maturity c. 30-40 years. Then in September there will be another index-linked syndication.

Conventional gilts are simply those that aren't index-linked. They pay a fixed coupon (amount of interest ) on the nominal amount issued, and that nominal amount will be repaid when the gilt matures.

For example, today's syndicated gilt is the 4.5% Treasury Gilt 2034. Until this gilt matures on 7 September 2034, the holder will receive two six-monthly interest payments of £2.25 for each £100 of nominal gilt held (paid in Sept and March). When the gilt is redeemed in 2034, that holder will receive £100 for each £100 nominal plus the final interest payment.

Brilliant, thanks for the info. So if convential gilts are fully subscribed at this time I take it that whoever is making the purchase is happy that their return will stay above long term inflation? I know this is a bit simplistic because I assume that any pension fund etc buying the gilts will probably have a mix of investments - some being defensive to inflation (ie: index-linked gilts etc)?

Edited by MinceBalls
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Hi Free Trader - thanks for the posts -one of the best topics on the site.

My question - what is the likelihood of these gilts not being redeemed in c30-40 years a la War Bonds?

I'm confident the gilts will be redeemed on the scheduled date. That's the contract that the Government is making with the investor. It seems highly likely that the Government will still be wanting to borrow in 30-40 years' time, so it can't really afford to renege on those terms.

War bonds don't usually have a redemption date because no-one can be sure when the war will end. Investors are usually aware of this when they buy the bonds.

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...another question inspired by the above post - can anyone explain how these gilts being sold tallies with pension rules being changed to iniclude gilts. ie. even if the pension funds thought this was a rip off an very likely to be below inflation - are they forced in someway to buy them anyway.

And if so, is this the biggest theft of retirement savings since....errr....Gordons last raid?

Edited by CHF
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Brilliant, thanks for the info. So if convential gilts are fully subscribed at this time I take it that whoever is making the purchase is happy that their return will stay above long term inflation? I know this is a bit simplistic because I assume that any pension fund etc buying the gilts will probably have a mix of investments - some being defensive to inflation (ie: index-linked gilts etc)?

They don't always have to be confident about the return over inflation. Often they simply have a known liability, and the return on a conventional gilt will match that liability.

Take an annuity or a non indexed-linked pension. An actuary can take a view on the duration of the liability, and a conventional gilt can be purchased to cover it. It might not work out too well on a single case, but over hundreds or thousands of annuitants/pensioners it should average out if a suitable portfolio of gilts is acquired.

The same goes for index-linked gilts matching index-linked liabilities.

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The new 4.5% 2034 gilt falls just outside the BoE's buying window for QE, but I know this gilt has been touted as being a potential purchase target for the BoE if they extend QE further. It was sold on generous terms: 11-12 basis points higher than the 2032 yield.

Hi FT,

How big a factor do you think this is? Do you think "flipping" bonds is motivating a lot of purchases, or do you think this would represent a relatively small part of the market and most is just run-of-the-mill purchases by pension funds etc.

Also, Do you think the majority of these bonds selling today are being purchased with the intention of holding to maturity?

Cheers,

Libs

Edited by libspero
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... unintended consequences, part deux...

http://www.bloomberg.com/apps/news?pid=206...id=avcmU5N8uBY0

Volatility on short-term options, known as gamma, on 10- year interest-rate swaps has increased as investors in mortgage securities hedge against the risk of changes in the pace of prepayments of loans, the firm said. Dealers’ short gamma position, a byproduct of the hedging, has grown “exceptionally large†because of an absence of offsetting selling of options by hedge funds that aren’t as leveraged as in the past, according to Credit Suisse.

:

Rising mortgage-bond yields, driven higher in part by climbing yields on Treasury rates, triggered speculation in recent weeks that higher mortgage rates would extend the average lives of home-loan bonds by reducing the pace of refinancing. Holders of the bonds, lenders and servicers began seeking to shorten the durations of holdings to make up for the effect. Duration is a measure of bond price sensitivity to interest-rate change.

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Hi FT,

How big a factor do you think this is? Do you think "flipping" bonds is motivating a lot of purchases, or do you think this would represent a relatively small part of the market and most is just run-of-the-mill purchases by pension funds etc.

Also, Do you think the majority of these bonds selling today are being purchased with the intention of holding to maturity?

Cheers,

Libs,

As far as today's syndicated sale is concerned I doubt that it was much of a factor. After all, there's no guarantee that the BoE is going to extend the QE programme. According to the DMO, 62% of the syndication today went to end investors (pension funds, insurance companies, fund managers etc.), a participation level that they described as 'very strong'.

Your guess is as good as mine as to whether they're being held to maturity, but certainly some of the pension funds and insurance companies will be intending to because of the liability matching I mentioned earlier.

As for participation by traders in general at the moment, it's simply got to be a major factor. You have a huge seller of gilts (the DMO) who simply must get the issuance away, and at the same time you have a huge buyer (the BoE) who simply must purchase up to certain quota. It's a bond trader's wet dream (or perhaps I should say gilt-edged market maker's wet dream).

This is why I wonder what will happen when the BoE exits QE. Maybe they'll do what I hypothesised earlier in this thread – extend QE up to the authorised £150bn but scale the rate of purchasing down for the final £25bn. This would avoid an abrupt end to their buying so the gilts market can adjust.

This is all just my opinion though, and I ought to stress again as I did on another thread that I'm not a dedicated gilts trader. I don't claim any expertise in this market, and I'm only using publicly available info and professional experience. My gilts trades for the portfolios I run aren't overly frequent and they range from mid six-figures to low seven-figures, so I'm an absolute minnow compared to the big guns out there. I also have no direct contact with the GEMMs.

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This is all just my opinion though, and I ought to stress again as I did on another thread that I'm not a dedicated gilts trader. I don't claim any expertise in this market, and I'm only using publicly available info and professional experience. My gilts trades for the portfolios I run aren't overly frequent and they range from mid six-figures to low seven-figures, so I'm an absolute minnow compared to the big guns out there. I also have no direct contact with the GEMMs.

Thanks,

Sorry for putting you on a pedestal.. for me and probably many others it is a new learning experience and we soak up knowledge where we can.

You may not be a Gilt Edged Market Maker, but you seem to know your way around the topic better than most of us :)

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Interesting thing on the ftse today, almost tempted to put up a BLACK WEDNESDAY thread, but I shall hold back.

The ftse broke through and held below a major down trendline today (and later tested it as reistance), paving the way for a rarther large sell off, could see 3650 rarther soon - watch the bonds and the overnight trade (turn on bloomberg in the morning for the futures trade).

Wish i could post my chart but dont have the facility. I cant actually see the potential bottom as its of screen!, but there should be support at 3650 - never the less, Obama is making an announcment tommorro which may just hold it up for a few days longer.

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Interesting thing on the ftse today, almost tempted to put up a BLACK WEDNESDAY thread, but I shall hold back.

The ftse broke through and held below a major down trendline today (and later tested it as reistance), paving the way for a rarther large sell off, could see 3650 rarther soon - watch the bonds and the overnight trade (turn on bloomberg in the morning for the futures trade).

Wish i could post my chart but dont have the facility. I cant actually see the potential bottom as its of screen!, but there should be support at 3650 - never the less, Obama is making an announcment tommorro which may just hold it up for a few days longer.

What will it be about?

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Add Spain to the Senior Central Banker vs Overspending Politicans Club. Change the names and it could be the UK.

Spain’s bank chief warns on deficit

The governor of the Bank of Spain on Tuesday bluntly told the government there was no room for deficit spending beyond the plans already announced to try to revive the economy.

In his sternest policy warning since the economic crisis began last year, Miguel Angel Fernández Ordóñez said Spain’s budget deficit could reach 10 per cent of gross domestic product next year, while government debt could exceed 60 per cent of GDP, up from less than 40 per cent at the end of 2008.

"This amounts to a drastic change of outlook, and any chance of using fiscal policy to increase spending has now been exhausted," he said in a speech on release of the bank’s 2008 annual report.

Like José Luis Rodríguez Zapatero, prime minister, Mr Fernández Ordóñez is a Socialist and a former senior government official. The Bank of Spain is not a fully independent body. But the policy clashes between economic conservatives at the bank and Socialist ministers who have embarked on one of Europe’s biggest fiscal stimulus plans have intensified in the recession.

Financial Times

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Wish i could post my chart but dont have the facility. I cant actually see the potential bottom as its of screen!, but there should be support at 3650 - never the less, Obama is making an announcment tommorro which may just hold it up for a few days longer.

Couple of other factors to consider as well:

Friday is triple witching (okay, quadruple witching to the youngsters ;) ) and of course we're approaching the end of the quarter.

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So I was on the WSJ website this morning and found this:

LONDON -- The U.K. enlisted the help of bankers to sell a government bond, in a sign that policy makers are seeking new ways to ensure the country can finance an expanding debt burden.

The U.K.'s Debt Management Office on Tuesday sold a larger-than-expected £7 billion ($11.4 billion) in 25-year government bonds, attracting investors with a yield about 0.11 percentage point higher than that of comparable bonds already in the market.

But in an approach rarely used by highly rated governments, the U.K. employed a syndicate of banks -- including Barclays PLC, Goldman Sachs Group Inc., HSBC Holdings PLC and Royal Bank of Scotland Group PLC -- to ensure the success of the sale by gauging investor demand in advance.

The move comes at a time when the state of public finances in the U.K., which by some estimates will see its national debt reach nearly 100% of annual economic output by 2013, has raised concerns about the government's ability to keep financing deficit spending through the bond markets.

Last month, ratings firm Standard & Poor's warned that the country could lose its triple-A credit rating if it doesn't get its finances in order. And in March, the government failed to attract enough investors for an auction of 40-year bonds amid concerns about the cost of its bailout plans.

Philip Laing, a portfolio manager focused on U.K. government bonds at Standard Life Investments in Edinburgh, Scotland, said the use of a syndicate suggests the U.K. government is nervous about the possibility of future failed auctions. "They're testing this process to see how it works, so they have the option in the future," he said.

Highly rated governments such as the U.K. and the U.S. typically sell their bonds at auctions, which involve attracting bids on the spot. In a syndication, by contrast, bankers take several days to market the debt to investors ahead of the actual sale, which lessens the likelihood of an auction failure. The banks aren't necessarily on the hook to buy any bonds that don't sell, which would take even more pressure off the U.K., but they could be asked to do so.

Tuesday's bond offering was the first syndicated U.K. government bond since September 2005, when the government syndicated an inflation-linked issue. The deal is the first of as many as eight syndicated gilt sales planned by the Debt Management Office for 2009-2010, intended to raise about £25 billion.

Is the Gov having problems funding the massive debt?

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Is the Gov having problems funding the massive debt?

Not really, they flogged all their crap to the banks, who paid with taxpayers money and now the banks are punting gilts as hard as they can to squeeze every last drop from willing investors before it all goes pop.

Thats how my simple mid sees it anyway.

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Not really, they flogged all their crap to the banks, who paid with taxpayers money and now the banks are punting gilts as hard as they can to squeeze every last drop from willing investors before it all goes pop.

Thats how my simple mid sees it anyway.

you follow lowrentyieldmakessense's silver posts the other day ? reckons it's gonna fly.....

I also remember Pluto saying in 2007 that silver might be as good if not better bet than gold ?

Edited by grumpy-old-man-returns
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