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Any big moves in the Gilts market today in recation to the data releases?

That GDP revision was a shocker (to me atleast)

Gilts ended on a downer today Ash, but they've had a good run recently.

The price action is becoming interesting, and counter-intuitive. Gilts were up this morning when the Nationwide data was out, but then they sold off later. I'm not sure whether this was down to the bad GDP print or the poor consumer confidence number from the US, but either way it's all backwards at the moment. Normally bad news would be a positive for gilts (because it suggests interest rates will stay low) and good news would be a negative (because it increases the chances of interest rates rising).

One possible explanation is that gilt prices are not being driven so much by the rates outlook at the moment as by fear over the budget deficit. In this scenario good news increases hopes that growth will be better than expected and hence govt tax revenues will be greater and expenditures less, easing deficit concerns and turning off money-printing. Bad news suggests the recession will persist, deepening the fiscal hole and in turn leading to worries that the market won't be able to absorb all the gilt issuance that will be required or we'll get inflation through debt monetisation. That will drive yields much higher (and so prices will correspondingly fall).

It's all Alice in Wonderland these days.

Big DMO auction tomorrow: £5.25bn of Treasury 2.25% 2014, which is outside the BoE's buying window. For reference this gilt was previously auctioned on 21 May (£5bn) and the cover was a very high 2.60 with an average yield of 2.91% and a tail of 0.9. Today this gilt closed in the secondary market with a yield of 3.15%.

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Gilts ended on a downer today Ash, but they've had a good run recently.

The price action is becoming interesting, and counter-intuitive. Gilts were up this morning when the Nationwide data was out, but then they sold off later. I'm not sure whether this was down to the bad GDP print or the poor consumer confidence number from the US, but either way it's all backwards at the moment. Normally bad news would be a positive for gilts (because it suggests interest rates will stay low) and good news would be a negative (because it increases the chances of interest rates rising).

One possible explanation is that gilt prices are not being driven so much by the rates outlook at the moment as by fear over the budget deficit. In this scenario good news increases hopes that growth will be better than expected and hence govt tax revenues will be greater and expenditures less, easing deficit concerns and turning off money-printing. Bad news suggests the recession will persist, deepening the fiscal hole and in turn leading to worries that the market won't be able to absorb all the gilt issuance that will be required or we'll get inflation through debt monetisation. That will drive yields much higher (and so prices will correspondingly fall).

It's all Alice in Wonderland these days.

Big DMO auction tomorrow: £5.25bn of Treasury 2.25% 2014, which is outside the BoE's buying window. For reference this gilt was previously auctioned on 21 May (£5bn) and the cover was a very high 2.60 with an average yield of 2.91% and a tail of 0.9. Today this gilt closed in the secondary market with a yield of 3.15%.

How liquid is the gilt market and is there a “gilt exchange†like the stock exchange or is it mostly over the counter?

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http://www.ft.com/cms/s/0/1b87b384-666b-11...144feabdc0.html

The Bank of England reached a milestone this week. Its purchases of UK government bonds, or gilts, rose above £100bn as part of its quantitative easing programme – a method of pumping money into the banking system to stimulate the wider economy.

The Bank now owns £103bn of tradeable gilts, or 15 per cent of the entire gilt market, making it by far the most aggressive of the leading central banks in its attempts to revive lending and demand by expanding the money supply.

The US Federal Reserve has bought $187bn of its own government bonds, just 3 per cent of the stock of US Treasuries. By comparison the Bank of Japan has bought $19bn this year, 0.3 per cent of stock. The European Central Bank has not purchased any eurozone government bonds, choosing to encourage demand by offering unlimited loans to banks in the short-term money markets.

Yet, in spite of its aggression, there is more pressure on the UK central bank to step up its quantitative easing programme, as worries grow in the UK that policymakers may end up being too cautious, leading to an extremely slow and protracted recovery.

Jim Leaviss, head of retail fixed interest at M&G, says: “It is early days, and all monetary policy measures act with a lag, but on three key tests there are no signs that quantitative easing is working yet in the UK. QE has not boosted inflation, bond yields remain around levels they were when the policy was launched in March, and mortgage and other lending to the real economy remains stagnant. On balance, the Bank might be wise to increase QE.â€

He points to UK 10-year bond yields at 3.76 per cent compared with 3.64 per cent when QE was launched on March 5, an annual retail price inflation rate for May of minus 1.1 per cent and weak new mortgage approvals to back up his argument.

John Wraith, head of sterling rates product development at RBC Capital Markets, says the weakness of UK money supply figures also bolsters the case for more aggressive action. M4, or broad money, lending to private non-financial corporations – considered an important barometer – has slowed dramatically this year to an anaemic growth rate of 0.3 per cent.

“The main aim of increasing central bank reserves is to boost the broad money supply,†he says. “We would not have expected QE to have demonstrably fed through to the non-financial sector yet, but the early signs are dangerously weak. The Bank cannot afford to be too cautious. Although the threat of deflation has receded, it is still a danger, and it is much harder to tackle deflation than inflation as we know from the Japanese experience.â€

Analysts say the Bank must be more aggressive than other central banks because of the UK’s greater dependence on the housing and finance sectors than other economies.

Mr Wraith says: “We also went into this crisis with higher levels of leverage. This means the deleveraging process, which is where a lot of the downward pressure on money supply comes from, is more intense here and needs to be addressed more aggressively.â€

In the US attention has turned to how the Federal Reserve will unwind the billions of dollars it has pumped into the markets. There, bankers fear a big step up in the Fed’s buy-back programme could undermine the dollar.

Sterling, in contrast to the dollar, has strengthened, jumping 20 per cent against the dollar and 10 per cent against the euro since the middle of March.

So what should the Bank do? Mr Wraith would like to see the Monetary Policy Committee increase the buy-back programme of £125bn – mostly gilts – to £150bn at its rate setting meeting next Thursday. Other analysts say the Bank should increase the type of gilts it can buy. It can buy only gilts of maturities between five and 25 years. The Bank could widen this from five to 30 or 35 years, they say.

Steven Major, head of global fixed income research at HSBC, says: “There are a number of changes the Bank can make. Increasing the size of the QE programme or widening the eligible band to enable the buying of more gilts seem like sensible options at this stage. The key message is that QE is not causing inflation, because the money is not finding its way into the economy, so the Bank can afford to be aggressive.â€

Oh dear QE is not inflationairy because the cash isn't finding it's way into the economy. The economy must be in an truly dire state - the GDP numbers are showing worst recession since the 1930's. I'm not sure they can say deflation isn't a problem it still seems to be bearing down on the economy. I wonder if they can keep the plates spinning until the election ?

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http://www.ft.com/cms/s/0/1b87b384-666b-11...144feabdc0.html

Oh dear QE is not inflationairy because the cash isn't finding it's way into the economy. The economy must be in an truly dire state - the GDP numbers are showing worst recession since the 1930's. I'm not sure they can say deflation isn't a problem it still seems to be bearing down on the economy. I wonder if they can keep the plates spinning until the election ?

But strangely Goldman Sachs is paying bumper bonuses.

Once again I wills state that banks do not create wealth. They just scam the system. Its like having the cheats in a computer game.

Time to close down Goldman Sachs and hang a few bankers for effect.

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Problem: It isn't working! Solution: Do more of the same! :blink:

Yeah, you have to laugh. That FT article Ash posted is titled: "Bank pushed to step up QE" and it goes on to say:

"...there is more pressure on the UK central bank to step up its quantitative easing programme, as worries grow in the UK that policymakers may end up being too cautious, leading to an extremely slow and protracted recovery."

So where's this pressure coming from?

Jim Leaviss, head of retail fixed interest at M&G: "On balance, the Bank might be wise to increase QE."

John Wraith, head of sterling rates product development at RBC Capital Markets: "The Bank cannot afford to be too cautious."

Steven Major, head of global fixed income research at HSBC: "Increasing the size of the QE programme or widening the eligible band to enable the buying of more gilts seem like sensible options at this stage."

So, no vested interests there then.

And according to the authors: "Analysts say the Bank must be more aggressive than other central banks because of the UK’s greater dependence on the housing and finance sectors than other economies."

Hmm, I wonder who those analysts work for? ;)

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http://www.ft.com/cms/s/0/1b87b384-666b-11...144feabdc0.html

Oh dear QE is not inflationairy because the cash isn't finding it's way into the economy. The economy must be in an truly dire state - the GDP numbers are showing worst recession since the 1930's. I'm not sure they can say deflation isn't a problem it still seems to be bearing down on the economy. I wonder if they can keep the plates spinning until the election ?

I thought we were seeing inflation, unfortunately its in the recent mini bounce in house prices. QE is not about cash 'finding it's way into the economy', it's about proping up bubble value house prices. Nothing more than that. Every effort is being made to do so, it's the reason d'etre of the BoE, to keep the HPI-MEW economy going. Look at what they are doing, not what they are saying. Look at the change in the two/three year swap rate compared with the ten year swap rate, look at the mortgage costs on a two/three fix. It's a deliberate BoE sponsored ARM. And it makes me sick.

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Ahead of next week's MPC meeting...

Most of the members of the Shadow Monetary Policy Committee believe QE should be extended.

The British Chambers of Commerce has issued a press release calling for QE to be intensified.

Questions from the bear of little brain sorry.

In my view QE will need to be maintained and expanded in order to ensure the full effects are transmitted to households and businesses across the country. The Bank of England should therefore increase QE beyond the £150bn (or 7.4% of M4) that it is currently authorised to complete, requesting authorisation for a further £150 billion in asset purchases. In the meantime Bank Rate should be held at its current level of ½%.

Is that suggesting a further £150bn?

In my view the natural assumption is still that this is a reprieve. House prices still need to fall a further 20% or so, deleveraging by households has barely begun, the banking sector is so vulnerable that it could yet be driven into widespread default by even a moderate further shock, UK government spending is so exorbitant that it will certainly have a major effect upon the sustainable growth rate of the economy if it is not rapidly curtailed, and the UK government deficit is so wild that it must be brought under control rapidly, by tax rises if not spending cuts, if the government is to retain credibility with its creditors. All of this augurs ill for the future growth path of the economy. Even if there is not a further significant downturn (and my expectation is that there will be such), the chances of rapid growth in the recovery phase must be slim to none.

Is that fall another 20% from the 20% they have supposedly already fallen? So what do people mean when they say "prices still need to fall another 20%"? That anything other than a 40% adjustment in property values is just not sustainable?

The Market Oracle said:

UK house prices peaked in August 2007 (UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth), and thereafter followed an accelerating bear market trend into December 2008 which took UK house prices lower by more than 20% and prompted the in depth updated house price forecast that covered the trend into 2012, which projects for a total drop from peak to trough of 38%. The rate of descent peaked for December 08 data at -19% and has now improved to -17.7% for April 09 data. The housing market crash is showing signs of pausing which as the government has in its power the ability to print money to effectively bring nominal house price falls to standstill, this money printing is now quaintly termed as "Quantitative Easing" so as to hide the truth and mask the continuing crash in UK house prices that despite the opinion of the mainstream press by the likes of Anatole Kaletsky and Ambrose Evans-Pritchard HAS put Britain on the path towards bankruptcy, as explained in the depth analysis of November 2008 - Bankrupt Britain Trending Towards Hyper-Inflation?, and more recently - Darling's Recession Debt Crisis Budget, Britain's £1.2 Trillion Public Sector Black Hole

So is this it? Will the govenment print enough to keep property values from falling despite the Bank of England official warning the Government against trying to prevent the housing crash?

In a controversial call, Markets Director Paul Fisher said it would be ‘dangerous’ for policymakers to try to stem the relentless slump in the value of property.

In testimony to the Treasury Committee, Mr Fisher said: ‘I think the most important thing for the housing market is that prices should be allowed to adjust to a level at which people can afford to buy houses.’

In recent years potential buyers were unable to get onto the property market because ‘houses were just so expensive,’ he went on.

We have to allow the housing market to find a new level at which people can afford to enter it.’Britain has seen one of the deepest property slumps of any advanced nation since the onset of the credit crunch. ..

.....‘There is a danger that policy intervention in the housing market stops these sorts adjustments from happening

.

‘We have to be very careful with policy intervention that we don’t actually make it worse.’

Property prices are still 40 per cent above their historic averages, suggesting further declines are unavoidable, the Organisation for Economic Co-operation and Development said earlier this month.

Analyst Vicky Redwood of Capital Economics said: ‘The housing market correction has to happen and we may as well get it over with sooner rather than later.

‘It is obviously in the government’s interests to try to delay any adjustment in house prices and get them to fall at a slower pace for political reasons.’

Treasury Committee chairman John McFall said: ‘Policy interventions have to accept there has to be a floor in the market. There can be no artificial stimulus.’

Edited by Sybil13
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Excellent, how predictable. Never can have too much of a good thing.

oh yes

a lesson from history

http://mises.org/books/inflationinfrance.pdf

And, first, in the economic department. From the early

reluctant and careful issues of paper we saw, as an immediate

result, improvement and activity in business. Then

arose the clamor for more paper money. At first, new issues

were made with great difficulty; but, the dyke once broken,

the current of irredeemable currency poured through; and,

the breach thus enlarging, this currency was soon swollen

beyond control. It was urged on by speculators for a rise

in values; by demagogues who persuaded the mob that a

nation, by its simple fiat, could stamp real value to any

amount upon valueless objects. As a natural consequence a

great debtor class grew rapidly, and this class gave its influence

to depreciate more and more the currency in which

its debts were to be paid.†

The government now began, and continued by spasms to

grind out still more paper; commerce was at first stimulated

by the difference in exchange; but this cause soon ceased

to operate, and commerce, having been stimulated unhealthfully,

wasted away.

Manufactures at first received a great impulse; but, ere

long, this overproduction and overstimulus proved as fatal

to them as to commerce. From time to time there was a

revival of hope caused by an apparent revival of business;

but this revival of business was at last seen to be caused

more and more by the desire of far-seeing and cunning men

of affairs to exchange paper money for objects of permanent

value. As to the people at large, the classes living on fixed

incomes and small salaries felt the pressure first, as soon

as the purchasing power of their fixed incomes was reduced.

Soon the great class living on wages felt it even more sadly.

Prices of the necessities of life increased: merchants were

obliged to increase them, not only to cover depreciation of

their merchandise, but also to cover their risk of loss from

fluctuation; and, while the prices of products thus rose,

wages, which had at first gone up, under the general stimulus,

lagged behind. Under the universal doubt and discouragement,

commerce and manufactures were checked or

destroyed. As a consequence the demand for labor was

diminished; laboring men were thrown out of employment,

and, under the operation of the simplest law of supply and

demand, the price of labor—the daily wages of the laboring

class—went down until, at a time when prices of food, clothing

and various articles of consumption were enormous,

wages were nearly as low as at the time preceding the first

issue of irredeemable currency.

The mercantile classes at first thought themselves exempt

from the general misfortune. They were delighted at the

apparent advance in the value of the goods upon their

shelves. But they soon found that, as they increased prices

to cover the inflation of currency and the risk from fluctuation

and uncertainty, purchases became less in amount and

payments less sure; a feeling of insecurity spread throughout

the country; enterprise was deadened and stagnation

followed.

New issues of paper were then clamored for as more

drams are demanded by a drunkard. New issues only increased

the evil; capitalists were all the more reluctant to

embark their money on such a sea of doubt. Workmen of

all sorts were more and more thrown out of employment.

Issue after issue of currency came; but no relief resulted

save a momentary stimulus, which aggravated the disease.

The most ingenious evasions of natural laws in finance which

the most subtle theorists could contrive were tried—all in

vain; the most brilliant substitutes for those laws were

tried; "self-regulating" schemes, "interconverting" schemes

—all equally vain.* All thoughtful men had lost confidence.

All men were waiting; stagnation became worse and worse.

At last came the collapse and then a return, by a fearful

shock, to a state of things which presented something

like certainty of remuneration to capital and labor. Then,

and not till then, came the beginning of a new era of prosperity.

Just as dependent on the law of cause and effect was the

moral development. Out of the inflation of prices grew

a speculating class; and, in the complete uncertainty as to

the future, all business became a game of chance, and all

business men, gamblers. In city centers came a quick growth

of stock-jobbers and speculators; and these set a debasing

fashion in business which spread to the remotest parts of

the country. Instead of satisfaction with legitimate profits,

came a passion for inordinate gains. Then, too, as values

became more and more uncertain, there was no longer any

motive for care or economy, but every motive for immediate

expenditure and present enjoyment. So came upon the

nation the obliteration of thrift. In this mania for yielding

to present enjoyment rather than providing for future comfort

were the seeds of new growths of wretchedness: luxury,

senseless and extravagant, set in: this, too, spread as a

fashion. To feed it, there came cheatery in the nation at

large and corruption among officials and persons holding

trusts. While men set such fashions in private and official

business, women set fashions of extravagance in dress and

living that added to the incentives to corruption. Faith in

moral considerations, or even in good impulses, yielded to

general distrust. National honor was thought a fiction cher-

ished only by hypocrites. Patriotism was eaten out by

cynicism.

Thus was the history of France logically developed in

obedience to natural laws; such has, to a greater or less degree,

always been the result of irredeemable paper, created

according to the whim or interest of legislative assemblies

rather than based upon standards of value permanent in

their nature and agreed upon throughout the entire world.

Such, we may fairly expect, will always be the result of

them until the ñat of the Almighty shall evolve laws in the

universe radically different from those which at present

obtain.*

And, finally, as to the general development of the theory

and practice which all this history records: my subject has

been Fiat Money in France; How it came; What it brought;

and How it ended.

It came by seeking a remedy for a comparatively small

evil in an evil infinitely more dangerous. To cure a disease

temporary in its character, a corrosive poison was administered,

which ate out the vitals of French prosperity.

It progressed according to a law in social physics which

we may call the "law of accelerating issue and depreciation."

It was comparatively easy to refrain from the first

issue; it was exceedingly difficult to refrain from the second;

to refrain from the third and those following was practically

impossible.

It brought, as we have seen, commerce and manufactures,

the mercantile interest, the agricultural interest, to ruin.

It brought on these the same destruction which would come

to a Hollander opening the dykes of the sea to irrigate his

garden in a dry summer.

It ended in the complete financial, moral and political

prostration of France—a prostration from which only a

Napoleon could raise it.

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oh yes

a lesson from history

http://mises.org/books/inflationinfrance.pdf

At first, new issues

were made with great difficulty; but, the dyke once broken,

the current of irredeemable currency poured through; and,

the breach thus enlarging, this currency was soon swollen

beyond control. It was urged on by speculators for a rise

in values; by demagogues who persuaded the mob that a

nation, by its simple fiat, could stamp real value to any

amount upon valueless objects. As a natural consequence a

great debtor class grew rapidly, and this class gave its influence

to depreciate more and more the currency in which

its debts were to be paid.†

Chilling, if we don't stop this madness we will go Weimar.

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10 year note surging today, massively surging.

http://online.wsj.com/article/BT-CO-20090708-714070.htmlhttp://online.wsj.com/article/BT-CO-20090708-714070.html

Something seems to be afoot.

Chart here

Possibly a signal that the waning equity rally is over.

Yes, everything today had deflationary positioning written all over it...except for US equities which held up pretty well.

This has been an impressive rally in US Treasuries (and UK gilts to a lesser extent) and bears out the point made earlier in the thread that higher yields due to structural budget deficits and debt monetisation is by no means a one-way bet. Despite the IMF's brighter outlook, sentiment is moving back towards a protracted slump. Quite possibly this will lead to more stimulative measures being implemented (both fiscal and monetary) that will then get those inflationary fears going again.

I'm sticking with my long-held belief that governments and central banks are fighting a losing war, but we're a long way from any admission of defeat. The issue that they can't easily resolve though is the debt overhang. While that still exists there can be no meaningful recovery, because recovery implies higher interest rates (and an unwinding of QE policies) which governments and households simply cannot afford. The greater interest burden immediately sends us back to square one.

At least we're seeing some humility now. More than one economist has said recently that they can now understand the problems that policymakers in the 30's were confronted with. There really is no easy solution to this mess, and academic macroeconomic theory doesn't prepare one for the reality of dealing with real-time markets and political considerations.

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Gilt ‘Russian Roulette’ Deters Pimco From U.K. Debt as BOE Buys

The U.K.’s growing budget deficit and the central bank’s reluctance to say when and by how much it will expand so-called quantitative easing are keeping Pacific Investment Management Co., which runs the world’s biggest bond fund, and BlackRock Inc. from increasing their holdings of the securities.

Guessing which gilts the central bank is going to buy is like “playing Russian roulette,†said Philip Laing, the Edinburgh-based director of government bonds at Standard Life Investments, which has about 118 billion pounds ($191 billion) under management. “While they’ll probably extend it, we are focused on the end of quantitative easing.â€

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I love being reminded of this stuff. However I think your interpretation in this instance is incorrect. The expansionary phase was 1971 - 2007, in bank credit rather than printed money. This QE is the attempt to stabilise things so we can have another round of speculation on something.

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There was no announcement of any extension to the present £125bn of asset purchases by the BoE under its quantitative easing programme by the MPC today. News release by BoE

I must admit, I'm surprised.

I thought the remaining £25bn was pretty much a given.

edit: should this not have it's own thread?

Edited by Timm
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