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So for us simples, the question is, will they continue to throw sh1t at the wall in the hope it continues to stick even though it has started to fall off already and just how much poo can they get to stick before it all comes crashing down in one stinking mound of excrement? Do they think they can keep the poo stuck on the wall until the next election?

I very much doubt they will keep it going until the next election. My personal prediction is that TSHTF around September/October time. But remember Brown knows HE CAN'T GET THIS WRONG. It's the ultimate bet. He desperately needs things to get better but time is running out.

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<snip>

I'm guessing the MPC will use the extra £25bn of QE authorised, but if they extend the programme beyond £150bn, I think they'll be showing their true hand. It will be apparent that this is essentially about monetising UK public debt because there aren't enough genuine buyers to take it up at a yield that won't prove crippling for the public finances.

I think there are quite a few here who would agree with that, so I'd guess there are probably a few movers and shakers out in the real world who think the same.

If this is true, and they do extend beyond £150Bn, am I right in thinking this could conceivably result in a run on the pound?

edit: add snippity

Edited by Timm
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I very much doubt they will keep it going until the next election. My personal prediction is that TSHTF around September/October time. But remember Brown knows HE CAN'T GET THIS WRONG. It's the ultimate bet. He desperately needs things to get better but time is running out.

OK, so they stop throwing poo and pray that a hot summer bakes it onto the wall so that it doesn't all slide off in one big mound before the next election. Considering our variable winters this is one BIG gamble. And it WILL fall off at some point.

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I would think today's result is a slight concern for the DMO. There's a net drain of gilts at present because the BoE is buying them faster than the DMO is selling,

well no-one saw that one coming eh...selling debt to yourself is not an effective business I find. :lol::lol:

but unless QE is extended the DMO will be on its own in around five weeks' time.

h'mmm.......I wonder if they will turn the printing press off or set it at full speed ahead..... ;)

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well no-one saw that one coming eh...selling debt to yourself is not an effective business I find. :lol::lol:

h'mmm.......I wonder if they will turn the printing press off or set it at full speed ahead..... ;)

They'll announce "no more QE" with a big fanfare, then do it anyway in secret.

(If possible. Lots of watchful eyes about.)

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http://www.telegraph.co.uk/finance/finance...ers-strike.html

UK debt chief Stheeman dismisses prospect of 'buyers strike'

Britain has no risk whatsoever of facing a "buyers' strike" where investors abandon its debt, the head of the Debt Management Office (DMO) has insisted on Tuesday.

By Edmund Conway, Economics Editor

Published: 1:19PM BST 23 Jun 2009

Robert Stheeman dismissed fears that markets would simply baulk at the record amount of debt set to be issued in the coming years.

Speaking at the Global Borrowers and Investor's Forum, organised by Euromoney, Mr Stheeman said: "This notion of a buyers' strike is something very peculiar to the UK because some people have memories of the 1970s.

"This flies in the face of the facts. Government borrowing markets are the most liquid and efficient markets that you will find anywhere. If markets have trouble absorbing issuance then prices will fall and yields will rise. What we won't see is a buyers' strike."

Mr Stheeman also said that the DMO remains "colourblind" to the fact that the Bank of England is buying £125bn or more of gilts through its quantitative easing programme, saying it would carry on issuing debt as normal, and pointing out that the DMO has already issued a quarter of the debt it planned to this year.

He said that although ratings agency Standard and Poor's last month put UK debt on a "negative outlook", he had yet to discern any negative effects.

"We haven't seen any effect from it," he said. "When the news came out it was an hour and a half before our biggest auction ever. As it happened we had more bids in that auction than we had ever had before."

He added that it remained a challenge trying to sell the £220bn of debt the government is trying to raise this year.

He said: "I wouldn't want to give the sense that we are completely ignorant of the fact that this is an extremely large financing requirement that we face.

"But markets have performed very well. We had an uncovered auction in March but since then the covers we received have risen"

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I think there are quite a few here who would agree with that, so I'd guess there are probably a few movers and shakers out in the real world who think the same.

If this is true, and they do extend beyond £150Bn, am I right in thinking this could conceivably result in a run on the pound?

It's conceivable, but I wouldn't say it's at all probable. There are still plenty of economists who believe an extension of QE is the right policy option on macroeconomic grounds, so such a move is already partially discounted by markets at present.

More likely in my view is that an expansion of QE will result in investors seeking a higher risk premium for holding conventional gilts. This in turn raises general longer-term interest rates and simply prolongs any slump, because the overhang of debt in the economy is still too great. We're seeing this happen in the US where mortgage rates are gradually increasing despite all the unconventional policies of the Fed.

In the end it boils down to what investors believe the Government will do, not the BoE. The market should be able to absorb this issuance and live with QE if there's a belief that our budget deficit will be brought under control. If however a perception develops that 1) public spending will not be adequately addressed, and 2) the BoE will always step in as buyer-of-last-resort of govt debt, then we could move to capital flight very rapidly. And I mean VERY rapidly.

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Stheeman's absolutely right, but there's not much solace to be found in the fact that there will always be buyers for UK debt. The more relevant factor is what yield they will demand for bidding at the auction.

I posted a chart much earlier in the thread where I showed how much debt the UK Government is going to have to roll in the next few years on top of the issuance for the running deficit. If that debt is rolled at much higher rates than expected, then the interest burden is going tol be a big yoke around our necks.

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In the end it boils down to what investors believe the Government will do, not the BoE. The market should be able to absorb this issuance and live with QE if there's a belief that our budget deficit will be brought under control. If however a perception develops that 1) public spending will not be adequately addressed, and 2) the BoE will always step in as buyer-of-last-resort of govt debt, then we could move to capital flight very rapidly. And I mean VERY rapidly.

(Amateur alert!)

That's pretty much my reading of it as well, in that the government borrowing situation is completely political. My guess would be it's actually Labour's poor poll showing at the moment that's allowing the current situation to continue, as it's pointing the way to a change of government policy in less than a year's time. Impossible to test it I know, but it would be very interesting to know what those who're lending at the moment would do if the polls were pointing at a clear Labour victory.

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In my dullard's opinion, the action really starts when the VAT cut is reversed. This will push inflation higher and there will be no room for claiming QE is required to combat deflation.

If further QE is approved at this point, I think it's a fairly safe bet that we are in for sustained inflation and a possible run on the pound (though not as dramatic as Iceland).

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US Treasury auction changes may overstate indirect bid

Wed Jun 24, 2009 2:10pm

By Pedro Nicolaci da Costa

NEW YORK, June 24 (Reuters) - Recent changes to the way the U.S. Treasury tallies demand at its bond auctions may be artificially inflating "indirect bids," a category used by investors as a loose proxy for foreign demand.

Foreign investors own more than a quarter of the Treasury market, making their continued interest in U.S. bonds of paramount importance to the market.

At the very least, the Treasury's shift, made earlier this month, is confusing traders, prompting some to second-guess the apparent strong interest in recent auctions.

Indirect bids have been unusually strong of late, reaching a record 68 percent at Tuesday's two-year note sale, and exceeding 62 percent at Wednesday's sales of $37 billion in five-year notes.

"We're not going to make much of that, given the information we've gotten on the rule changes," said John Spinello, fixed-income strategist at Jefferies, a primary dealer. "The indirect bids are now going to be higher given the change in procedures."

Indirect bids are defined as ones that do not go through primary dealers, large banks that do business directly with the Fed and are required to actively take part in Treasury auctions.

Top officials in China and Russia have expressed unease about the growing U.S. budget deficit, slated for a record $1.75 trillion in fiscal 2009 alone. This means that traders pay extra close attention to foreign demand figures.

The Treasury's changes, contained in a June 1 entry to the Federal Register, relate to what it considers a "guaranteed bid." Under the previous arrangement, once a primary dealer offered securities at a pre-specified level to its customer, that bid was considered to be the dealer's own.

The matter was technical enough to confuse even industry veterans.

"We are not precisely sure what this all means," said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey.

"We spoke with some very seasoned market players with decades of experience on dealer trading floors who were similarly unsure what to make of the contents of the Federal Register."

The Federal Register entry can be found here

The Treasury was not immediately available for comment.

http://www.reuters.com/article/bondsNews/i...425368520090624

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In my dullard's opinion, the action really starts when the VAT cut is reversed. This will push inflation higher and there will be no room for claiming QE is required to combat deflation. . .

There are also 4 months or so of negative MoM CPI that will drop out of the index from October onwards. That is going to make inflation look higher.

That might imply an extension of QE within the next three months. But wouldn't an anouncement that they were to use the remaining £25Bn, and an extension of the £150Bn, both within the same quarter look a bit, well, enthusiastic?

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Just a technical update:

The following paragraph appeared in the BoE's Asset Purchase Facility operational notice yesterday:

"UKT 5% 2014 and UKT 8% 2021 are excluded from Asset Purchase Facility gilt purchase operations until further notice. The Bank will continue to keep the identity of gilts eligible for purchase under the APF under review, taking into account the size of Asset Purchase Facility purchases to date relative to the nominal amount of those stocks in issue and their relative richness to the curve."

If you look at the chart below you can see why the Bank has removed these two gilts from its buying list. It now holds roughly 50% of each issue and this has been creating some obvious distortions in the market. For example, the yield on the 2021 gilt has recently been as much as 12 basis points below that of the 2020 gilt (when you would normally expect it to be higher).

It was also noticeable that the DMO unusually issued an additional £5.5bn of the 5% 2014 gilt on 9 June, presumably to alleviate supply concerns because of the BoE's large holding.

The yields on the respective 2014 and 2021 gilts jumped yesterday on the announcement, especially the 2014 gilt which closed at a yield of 2.74% yesterday, having been 2.54% the day before. I don't know how much of this move was simply the market-makers' response on pricing, but I would think some traders were caught flat-footed by the Bank's announcement.

In aggregate the BoE now holds nearly 30% of the supply of the fifteen gilts it has been purchasing under QE.

BoEAPFholdings260609.gif

Edit: couple of typos

Edited by FreeTrader
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at the moment everything jsut seems to be geared towards supporting the unbridled public spending of the last decade.Look at the action at PMQs and it's Brown accusing the Tories of planning cuts in what he calls 'investment'.

I think it's because there hasn't been a regime/government change yet, so labour could hardly admit they have fooked the economy up as they all get the blame. Blair played a blinder leaving gopher gordon the only major suspect. Only when a new government comes in will things change (although nothing will change really, welcome to new boss, same as old boss).

That's why Labour have initiated the QE (printy printy) program, because it's their only option really.

All governments fear deflation.

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In aggregate the BoE now holds nearly 30% of the supply of the fifteen gilts it has been purchasing under QE.

30%?! Am I reading this incorrectly or has the BoE printed money for 30% of the gilts over 15 auctions? Isn't that rather high or am I reading more into it than I should be? :unsure:

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In my dullard's opinion, the action really starts when the VAT cut is reversed. This will push inflation higher and there will be no room for claiming QE is required to combat deflation.

If further QE is approved at this point, I think it's a fairly safe bet that we are in for sustained inflation and a possible run on the pound (though not as dramatic as Iceland).

http://www.bankofengland.co.uk/publication...in/qb090201.pdf

Why is the MPC undertaking asset purchases?

The inflation target is symmetric. If inflation looks set to rise

above target, then the MPC tightens monetary policy to slow

spending and reduce inflation. Similarly, if inflation looks set

to fall below 2%, the Bank loosens monetary policy to boost

spending and inflation. Indeed, the MPC reduced Bank Rate

rapidly in response to the sharp tightening in credit conditions

and a global slump in confidence following the collapse of

Lehman Brothers in September 2008. By March 2009, Bank

Rate was at 0.5%.

Despite the substantial stimulus already in the pipeline from

monetary policy and other factors, such as fiscal policy and the

sharp depreciation of sterling, the MPC judged at its March

meeting that a further monetary loosening was required. In

particular, it was concerned that nominal spending in the

economy would otherwise be too weak to meet the inflation

target in the medium term. Four-quarter growth in nominal

GDP fell to -2.4% in 2009 Q1 (Chart 1), its lowest level since

the quarterly series began in 1955.

Exit strategy

As the economy recovers, the medium-term outlook for

inflation will improve. As in normal times, the Committee will

be guided by the medium-term outlook for inflation relative to

the inflation target. Given that the inflation target is

symmetric, if inflation looks set to rise above the 2% target,

then the Committee will want to tighten monetary policy to

slow spending and reduce inflation.

Monetary policy could be tightened in a number of ways. It

could involve some combination of increases in Bank Rate and

sales of assets in order to reduce the supply of money in the

economy. Alternatively, the supply of reserves could be

reduced without asset sales, through the issuance of

short-term Bank of England bills.

The way that I read this is QE's primary function is to bring CPI "outlook" back to target at 2%. As Timm says there are 4 or 5 months of negative MoM Cpi to drop out later in the year and as you say the VAT cut will have to be reversed at some point.

With sterling's recent devaluation starting to work its way through to the high street and I believe another 2p tax to go on petrol prices (unleaded already back upto @ £1.05) the Bank if they are good for their word will have a major problem on their hands.

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US Treasury auction changes may overstate indirect bid

Wed Jun 24, 2009 2:10pm

By Pedro Nicolaci da Costa

NEW YORK, June 24 (Reuters) - Recent changes to the way the U.S. Treasury tallies demand at its bond auctions may be artificially inflating "indirect bids," a category used by investors as a loose proxy for foreign demand.

http://www.reuters.com/article/bondsNews/i...425368520090624

Fed primary dealer pulls out:

Dresdner withdraws as primary dealer for Fed

market pulse

Jun 26, 2009, 12:04 p.m. EST

NEW YORK (MarketWatch) -- Dresdner Kleinwort Securities has withdrawn from the Federal Reserve's primary U.S. government security dealers, the U.S. central bank said Friday.

http://www.marketwatch.com/story/dresdner-...-fed?siteid=rss

Karl Denninger:

SEVERELY Bearish Treasury Development

From Marketwatch:

NEW YORK (MarketWatch) -- Dresdner Kleinwort Securities has withdrawn from the Federal Reserve's primary U.S. government security dealers, the U.S. central bank said Friday.

The change is net neutral in terms of numbers as a new dealer just came online, but in general this is a major net negative for the Treasury market.

Why? Because being a primary dealer is, in general a license to print money. You get to field customer orders for Treasuries and make your spread, and you have a privileged trading position with The Fed.

There's only one fly in the ointment, and that is that the position comes with a requirement that you bid. This is distinct from most other nations where no such system exists, and essentially guarantees that there can never be a "failed" Treasury auction.

There was no reason cited for the withdrawal but one can surmise that the issue is that they're stuffed to the gills with Treasuries and are finding it difficult or impossible to earn their spread, think there is a material safety risk in their participation (e.g. getting stuck long with a deteriorating position), or both.

Either way there is no possible means to read this as bullish. While the issue may be with their liquidity demands and thus not reflect severely on the Treasury market with the issuance that has gone on this year and will for the foreseeable future I wouldn't take that bet.

The "Chosen" or "Protected" dealers will of course never withdraw but if the changes made to reporting of indirect bid are in fact concealing deteriorating demand and these folks have detected a potential problem in the offing we are fixing to get a severe spanking in our government debt issuance in the near future.

Beware.

http://market-ticker.denninger.net/archive...evelopment.html

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Now we have seen it all in the US - Bond Ramping.

Let's artificially inflate the apparent interest from foreign buyers. This is a tactic straight out of the Estate Agency play book, like booking prospective purchasers into an open house viewing without telling them its an open house viewing or arranging the three viewings there are back to back so that viewers bump into each other on the way out - they'll soon be plastering sold signs all over their auction documents.

What next , will we see treasury spokesmen saying, "ah by T-bonds can only every go up, it Government paper dontcha know"

All I can say is they better start issuing more of those inflation linked index bonds then, as no fool is going to pay the nominal coupon summation plus hold to maturity value in today's money. You can't have zero interest rates as else your bonds quite literally become no better than cash - hang on there, perhaps that the plan - let the treasury spray bonds like they are nice shiny new Dollars coming off the press. Oh well, given that these bonds now have basically the same characteristics as cash, we might as well monetise them.

QUOTE (MOP @ Jun 25 2009, 01:24 AM) *

QUOTE

US Treasury auction changes may overstate indirect bid

Wed Jun 24, 2009 2:10pm

By Pedro Nicolaci da Costa

NEW YORK, June 24 (Reuters) - Recent changes to the way the U.S. Treasury tallies demand at its bond auctions may be artificially inflating "indirect bids," a category used by investors as a loose proxy for foreign demand.

http://www.reuters.com/article/bondsNews/i...425368520090624

Edited by mikelivingstone
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There was no reason cited for the withdrawal but one can surmise that the issue is that they're stuffed to the gills with Treasuries and are finding it difficult or impossible to earn their spread, think there is a material safety risk in their participation (e.g. getting stuck long with a deteriorating position), or both.

It may be too early to jump to conclusions on this. For example, do any of these reports refer to the fact that Dresdner's operations in many areas have been hugely scaled back since the takeover by Commerzbank, with Dresdner bearing the brunt of job losses etc.

I am speculating here but maybe this is just a de-registration of Dresdner's US fixed income business (to allow Comedybank to become a primary dealer). Or maybe Comedybank are so fcuked that they have to pull out of profitable businesses to use the capital elsewhere (on far more worthwhile things like propping up toxic loan books- seen this anywhere before?? :lol: )

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free trader are there major differences in the way the gilts are auctioned versus US treasuries?

Essentially any differences are cosmetic, but probably the biggest relates to participation access.

The UK's primary dealers, the Gilt-Edged Market Makers (GEMMs), have exclusive access to competitive bidding at the DMO's auctions. In contrast, individuals and organisations in the US can set up an account with TreasuryDirect and bid competitively at auction without going through a US Primary Dealer (PD).

I've noticed that Karl Denninger seems to believe that it's not really possible to have an uncovered US Treasury auction because the PDs are required to bid at auction. However, as far as I'm aware there's no minimum uptake at the auction that the PDs are obligated to. Like the GEMMs, the US PDs are expected to make bids at auction at least commensurate with their share of the secondary market. This applies over time rather than to a single auction, and if they persistently fail in this undertaking then they risk being stripped of their PD status.

The US PDs do make a high level of backstop bids (bids at a price well below the expected auction price) which effectively underwrites the auctions, but I don't believe there are any contractual requirements for them to do so.

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weird how you quote KD as that was the reason for me asking.I find it hard to beleive that commercial organisations can be forced to buy govt paper.the potential loss of PD status makes much more sense.

with reference to said 'ticker',it does indeed seem unusual in a PD relinquishing it's status when the bubble in govt debt seems to be balooning nicely.

at what point do you think we could see one of the GEMMs pulling out?

Must admit it's not something I've really considered. There should always be buyers for UK gilts – it just depends on what the yield is – so I don't believe the holding risk for the GEMMs is that great. More likely is that a GEMM would quit if its secondary market share fell below the minimum level the DMO requires (~2.5%).

They may be expected to give a minimum level of bids, but as far as I know there's nothing to stop them making those bids very low. Most countries issuing sovereign debt have some sort of primary dealer system, and rather than an auction being uncovered you'll sometimes see the govt debt manager refuse to take certain bids because they are too low.

Our own DMO reserves the right to refuse bids, so this is something to be aware of in the future. It's possible for an auction to fail even if the cover is greater than 1.0. The bids may simply be so low that the DMO finds them unacceptable.

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thought the following from Denninger was fascinating

'There was no reason cited for the withdrawal (Dresdner Kleinwort Securities ) but one can surmise that the issue is that they're stuffed to the gills with Treasuries and are finding it difficult or impossible to earn their spread, think there is a material safety risk in their participation (e.g. getting stuck long with a deteriorating position), or both.'

now,whilst I can see the reason for buying short dated gilts completely,going 30 years out,with the amount of printy printy being done,the logic begins to fail.

Why would you give up a gilt edged market making position like they had?It makes no sense unless Denninger was right.

transfer this to the UK.Our debt to GDP ratio is way out ahead of the US even.If we ever had a situation where we had a buyer strike after losing a couple of GEMM's,this would exacerbate any collapse in the bond market.

Whilst I'm sure many might say this is unlikely,my experience during this fiasco thus far has been to expect the unexpected.

how much do the GEMM's make on an auction as a percentage return IF they offload the gilts externally.At what point could you foresee one or two of them questioning their involvement?

Do you have a possible explanation for Dresdner's withdrawal?

thanks in advance

I don't know enough about GEMM operations and margins to give you an informed answer I'm afraid. However I think we should be careful in constantly attributing ulterior motives to headline events. That's something that the guys on Tickerforum can be a little guilty of at times (I can understand why, but there's a danger of becoming totally paranoid about the financial system).

Commerzbank (who own Dresdner) have said that they're quitting as a primary dealer in the US as part of their strategy to concentrate on European mainland operations. Maybe we should use Occam's razor and take what they say at face value. The fact that they're quitting as a GEMM (from tomorrow I believe) and also relinquishing primary dealerships elsewhere seems to be consistent with their explanation. Businesses change, strategies change – it doesn't always have to be indicative of some impending market failure or pressure.

It's certainly noticeable though that the number of PDs seems to be diminishing just as governments start issuing humongous amounts of debt. It may simply be that the banks are now capital and management constrained and can only support so many operations. They may also be wary of impending legislation that could require banks with significant investment banking operations to hold higher capital buffers.

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Ok there are a few articles in the press on anticipating the QE end but there's still demand out there. There was some poor lening data to companies, and businesses, and also there seems to be a public tension between the BOE and the government. There's a lot of data this week; tomo is GDP revision I think, Nationwide HPI, Halifax due so are we expecting the QE programme to be widened ?

http://www.telegraph.co.uk/finance/economi...Week-Ahead.html

June 29 (Bloomberg) -- U.K. 10-year government bonds rose as the Bank of England bought 3.5 billion pounds ($5.8 billion) of securities as part of its asset-purchase plan to revive the economy.

The gains drove the yield on the gilt to its lowest level in six weeks after Britain’s biggest business lobby group said financial-services companies may cut 13,000 jobs in the third quarter, stoking demand for the safest assets. Gilts also rose as a report showed the economic slump led to the smallest increase in net mortgage lending since records began in 1993. The Bank of England said it was offered 1.22 times the amount of securities it bought today.

http://www.bloomberg.com/apps/news?pid=206...id=acJ7o7Uk9qFg

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