U K's Tripe A Is Safe Say City Dealers, Invesco & Pimco Must Be Wrong

[0q0]

http://business.timesonline.co.uk/tol/business/economics/article6982298.ece

LEADING City firms, including some of the biggest dealers in UK government bonds - gilts - say a downgrade of Britains AAA sovereign debt rating remains unlikely this year.

This is despite a warning last week from Pimco, the worlds biggest bond-fund manager, which put the chances of a downgrade as high as 80%. Pimcos warning was echoed by Neil Woodford, head of investment at Invesco Perpetual, who said there was a high probability of a downgrade.

Personally, I go with Pimco and Invesco's assessment. Something's up, or should I say down.

Edit:: (thread headline should say Triple A, Tripe A is a typo that I will leave as it may be Freudian)

Edited January 10, 2010 by The Last Bear

[spivT]

The only risk would be a left-wing Labour-led coalition that believes ratings are just for bankers.

the lefties have at last got one thing right.

[0q0]

the lefties have at last got one thing right.

[Scunnered]

U K's Tripe A Is Safe

Well that's a relief.

[Joey Buttafueco Jr]

Personally, I go with Pimco and Invesco's assessment.

Can you give your reasoning please

[libspero]

To quote a small extract:

There is a 50% chance of a hung parliament, but even in this event the rating agencies would give the new coalition government at least a month to agree on sufficient fiscal measures to retain the country’s AAA rating,

We believe the ratings agencies will issue a stern warning and the resulting coalition government will agree sufficient measures to enable the UK to retain its highest rating at least for 2010. The only risk would be a left-wing Labour-led coalition that believes ratings are just for bankers.

Sounds pretty sensible.. the markets are waiting to see what the next government is planning.. provided they do the necessary on spending a downgrade can be avoided.

Time to get the popcorn out and see what the post election budget brings to the table.

[0q0]

Can you give your reasoning please

Property to the moon! We can live on state employment, debt and printed money forever and thrive!

Howzat?

[Mikhail Liebenstein]

Well that's a relief.

My dog will be happy.

[Wol]

Can you give your reasoning please

There is no plan to stop spending money unproductively.

[TheBlueCat]

http://business.time...icle6982298.ece

LEADING City firms, including some of the biggest dealers in UK government bonds - gilts - say a downgrade of Britain’s AAA sovereign debt rating remains unlikely this year.

This is despite a warning last week from Pimco, the world’s biggest bond-fund manager, which put the chances of a downgrade as high as 80%. Pimco’s warning was echoed by Neil Woodford, head of investment at Invesco Perpetual, who said there was a “high probability” of a downgrade.

Personally, I go with Pimco and Invesco's assessment. Something's up, or should I say down.

Edit:: (thread headline should say Triple A, Tripe A is a typo that I will leave as it may be Freudian)

This is pretty much irrelevant since gilts are already trading at the same prices as debt issued by countries with credit ratings lower than AAA. E.g. 10 year gilts yield about the same as the Italian equivalent but Italy has an AA- rating. Admittedly there's a bit of 'oh well, Germany will bail them out' in the Italian price (kind of like a free embedded CDS I guess) but, all the same, it tells you that formal credit ratings are not the whole story.

[TheBlueCat]

There is no plan to stop spending money unproductively.

I think it's worse than that: there is no plan to stop spending money we might well not be able to pay back without inflation.

[wren]

They will only downgrade when it is too late, i.e. they are not a useful source of information or predictor of future risks, only past risks.

[Georgia O'Keeffe]

They will only downgrade when it is too late, i.e. they are not a useful source of information or predictor of future risks, only past risks.

indeed a masterpiece of salesmanship to make money as a predictor of past events/risks

Edited January 10, 2010 by Tamara De Lempicka

[Goat]

To quote a small extract:

We believe the ratings agencies will issue a stern warning and the resulting coalition government will agree sufficient measures to enable the UK to retain its highest rating at least for 2010. The only risk would be a left-wing Labour-led coalition that believes ratings are just for bankers.

Sounds pretty sensible.. the markets are waiting to see what the next government is planning.. provided they do the necessary on spending a downgrade can be avoided.

What about a minority conservative gov't? Would they really be able to push through the sort of cuts that are needed.

[interestrateripoff]

There is no plan to stop spending money unproductively.

What's the plan to reduce the £900bn govt debt?

[Gone baby gone]

Is "there is no risk of a UK credit rating downgrade" the 2010 version of the 2008 classic "we are very well capitalized and have no problems with liquidity"?

[tomwatkins]

http://business.timesonline.co.uk/tol/business/economics/article6982298.ece

LEADING City firms, including some of the biggest dealers in UK government bonds - gilts - say a downgrade of Britain’s AAA sovereign debt rating remains unlikely this year.

This is despite a warning last week from Pimco, the world’s biggest bond-fund manager, which put the chances of a downgrade as high as 80%. Pimco’s warning was echoed by Neil Woodford, head of investment at Invesco Perpetual, who said there was a “high probability” of a downgrade.

Personally, I go with Pimco and Invesco's assessment. Something's up, or should I say down.

Edit:: (thread headline should say Triple A, Tripe A is a typo that I will leave as it may be Freudian)

I really don't know personally but one thing I do know-Why would PIMCO announce in advance they are dumping a boatload of anything? Makes no sense.

[mbga9pgf]

I really don't know personally but one thing I do know-Why would PIMCO announce in advance they are dumping a boatload of anything? Makes no sense.

Selling short in advance would be the main reason.

[TheBlueCat]

Selling short in advance would be the main reason.

Except that they're a long only mutual fund so can't sell short. Agreed it's not obvious why they would pre-announce their plan to sell though.

[TheBlueCat]

Except that they're a long only mutual fund so can't sell short. Agreed it's not obvious why they would pre-announce their plan to sell though.

Actually, just thought of one - they may think they have enough influence to make the UK government behave differently and, thereby, push up the value of their holdings of gilts.

[wish I could afford one]

This is pretty much irrelevant since gilts are already trading at the same prices as debt issued by countries with credit ratings lower than AAA. E.g. 10 year gilts yield about the same as the Italian equivalent but Italy has an AA- rating. Admittedly there's a bit of 'oh well, Germany will bail them out' in the Italian price (kind of like a free embedded CDS I guess) but, all the same, it tells you that formal credit ratings are not the whole story.

UK 10 Year Gilt Yields have gone from a low of around 3.02% in Dec 09 to around 4.06% today. This has occured at the same time as the Official bank Rate has fallen from 2% to 0.5%.

My thoughts on why this is occuring:

1. Inflation is rising and it appears to me as though the Bank of England is going to hold interest rates at 0.5%, ignore their inflation target of 2% and start to let debts be inflated away. Buyers of government debt will however expect a real (after inflation) return on their investment and so if inflation rises then gilt yields must also rise.

2. By my calculation UK government borrowing in 2010/2011 will be £150 billion and in 2011/2012 will still be £110 billion. To find buyers for all this debt (particularly if the Bank of England stops quantitative easing) you are going to have to attract them with increased yields.

3. The UK government are yet (and for that matter the Conservatives also) to explain how they are going to reduce the levels of borrowing. So far they have done nothing more than rearrange the deck chairs on the Titanic. If this continues the credit worthiness of the UK is going to be downgraded meaning yields will have to rise.

4. Those who already own government bonds (eg Pimco) and can see what’s happening will start to sell their holdings putting yet more gilts onto the market. More gilts coming to the market will mean gilt prices falling which will then mean rising gilt yields.

Could this be the catalyst for falling house prices as the interest rates on mortgages will have to rise as those wanting to borrow for a house will effectively be competing with the UK government for funds.

Expanded version with charts at http://retirementinvestingtoday.blogspot.c...are-rising.html

[Joey Buttafueco Jr]

The fact that we are rated AAA whilst trading in AA/AA- ranges might imply that the rating agencies will ignore reality and keep us at AAA no matter what. )

That is what I think will happen - it will require a lot for the agencies to mark us down.

[bearwithasorehead]

Even if the AAA status is lost it may not have the effect many on these boards think.

Rating agencies have cut and cut Japan's status, but it has no problem attracting buyers for its debt.

Japan's credit rating according to the 'expert' ratings agency, was, at one point lower than Botswana's.

Can anyone tell me how default by the British Government on sovereign debt issued in Pounds Sterling would work???

Of course, agencies were at the forefront of warning about Icelandic banks and should therefore be trusted not to have a VI in anything as important as sovereign debt...........

[Joey Buttafueco Jr]

Can anyone tell me how default by the British Government on sovereign debt issued in Pounds Sterling would work???

In theory it can't happen

[spivT]

In theory it can't happen

noel,

i've read it one or two other threads about investors buying insurance, or the stories were something along the

lines of the premiums on the risk of UK sovereign debt defualt [these were CDS i think] rising because of worries

about the state of public finances and what have you.......if there is no risk of default, why is such risk insurance

bought and traded as far as the UK, a sovereign govt. with own currency?

I know i'm straying a little into your bread and butter here. So apologies for sounding like a clothead when i talk

about this stuff. But i'd be interested to hear your views on this.