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Bond Dealers Refuse To Play 'russian Roulette'


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http://www.bloomberg.com/apps/news?pid=206...id=a4sov75Ek..s

The Bond dealers are shying away from UK debt. As the BoE ploughs on with QE it's a case of "Sold to you, Merv!".

Once QE stops we will have a full blown bond crisis.

Anyone like to guess where interest rates will be headed when that happens?

I dont think that the Bond Dealers are shying away from UK debt at all. I wouldnt be too worried if they were. It is potential buyers of bonds, not dealers, that you have to be concerned about. The dealers would only be worried if there were no bonds to deal in.

And buyers of UK debt seem to be happy enough. Looking on the BBC website, I see that there is a paltry yield of 4.32% for bonds redeemable in 2055. No signs of a crash there.

Then looking at the foreign exchange market, do we see any signs of sterling plummeting with all this printing? No sign there either since QE started. Pity really, as a lower pound would help the economy as it always does.

As for the remark about a bond crisis being caused when QE stops, I am afraid I just dont understand. At the point when monetary printing stops is a point at which inflationary expectations would be lowered. That will always cause bond prices to rise, other things being equal.

Now we may get a bond crisis at some point from all of this. But if that happens, then it will be when QE is actually working. A bond crisis will arise when inflationary fears are afoot. When that happens, asset prices will rise, lifting the banks balance sheets to a point when they can start operating normally again. The government will also be able to raise taxes and lower expenditure to counter these inflationary pressures. A bond crisis will be a symptom of things working again in our financial system.

No sign of that yet. Interesting as well just how much money is being pumped in. £150 billion, if that is levered by the banking system at a ratio of 10:1, that means £1.5 trillion of new money in the system. And still no signs of inflation!

Boy oh Boy what a crisis this is.

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The BoE can sell the bonds it buys and delete the money it gets selling them. Although I like Alan's method better.

Yes you just reiterated the first option. That would require willing buyers and as l already said would mean the govt paying interest on those bonds to the buyers despite the fact they would be deleting the principle theyt gain from it out of existence. As l said no govt is going to simply discard 100's of Bns of money its signed up to paying interest on.

Alan's option is logically sound, but you would be going from a (let's say) 1 in 10 to a 1 in 3.33 reserve arrangement if base money was tripled. This would be overkill from the banks perspective and is it likely they are going to be in any state to meet these levels any time soon? It seems that whatever course is taken it will create major problems for one systematic entity or another (banks or govt), and we all know what happens when tough decisions like these have to be made..they simply don't get made.

If it weren't for this issue l would be a plain deflationist. I'm still on the fence unfortunately <_<

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