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I saw today that a 5 year UK gilt will yield just over 1%. Even if they are considered ' safe' who in their right mind would buy them with inflation heading towards 5%?!

What could cause them to rise? I assume they have a major bearing on mortgage rates?

I'm not the most economically literate, so please forgive my naivety!

Thanks in advance

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I saw today that a 5 year UK gilt will yield just over 1%. Even if they are considered ' safe' who in their right mind would buy them with inflation heading towards 5%?!

What could cause them to rise? I assume they have a major bearing on mortgage rates?

I'm not the most economically literate, so please forgive my naivety!

Thanks in advance

Security of capital. Global investors expect recession/depression so inflation will fall, nut more importantly stocks and property will. So, govt bonds mean they get their money back.

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Prices for certain things are rising somewhat, but that doesn't mean inflation.

Killer Bunny reckons it's risk-off investment now, therefore return of investment through sovereign bonds rather than return on investment. When oil and commodities were rising, that was risk-on.

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The BoE printed, i say again manufactured 200 billion of electronic money out of thin air, by doing this they increased the base money by 200 billion pounds.

They purchased 200 billion pounds worth of UK gilts, this 200 billion pounds of newly manufactured money went ino the banking sector.......we know the rest inflation et al.............

But the BoE have not allowed the 200 billion of purchased UK gilits to unwind.....................Instead they have remained vigilant and maintained the 200 billion of UK Gilts, so by printing more money, steady as she goes remaining vigilant etc etc..............

If the UK administration arm of the BoE wants to deficit spend 200 billion a year, (17 billion a month), so adding 200 billion a year to the cumulative UK debt, then all the BoE have to do is print more money, steady as she goes remaining vigilant etc etc..............

As old Gilts mature, new ones are purchased, so to maintain the 200 billion, this allows the goverment to spend without borrowing from the markets, this drives down yields, and helps maintain ZIRP for the government and domestic households...............

They can literally print year in year out till eternity, its like Paul Daniels quotes "thats magic"

Edit, by maintaining the 200 billion of purchased UK Gilts with newly created zero's, the annual dificit spend is not added to the cumulative UK debt, as it is new money not backed by debt...............what an illusion...............

Edited by Panda

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I saw today that a 5 year UK gilt will yield just over 1%. Even if they are considered ' safe' who in their right mind would buy them with inflation heading towards 5%?!

Someone with a banking licence. They can buy the bonds with money borrowed from the BoE and net 0.5% on assets they otherwise wouldn't have. The only reason for an ordinary person to buy a 5-year gilt, these days, is as a cash-equivalent...

One reason to want these might be that you're speculating on the stock market - following trends. When there's no clear trend, you might park your money in gilts because this eliminates potential problems with a cash account should your broker or bank declare bankruptcy.

This is the effect of quantitative easing - the idea is that prices of gilts are hoisted as high as possible - putting yields as low as possible - to encourage bond holders to switch their investment to other assets as soon as possible.

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As far as I understand it:

Magic money (QE) bought lots of gilts. So their demand increased. And therefore so did their price. As the return you get on these gilts stays the same (The coupon) the yield on each one fell - as the price rose.

Although I am no expert on the subject.

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Am I wrong when I say the reason the percentage/coupon is so low is that the Bank of England is the party buying a lot of the Gilts as are the banks (by mandatory order) and that is what's creating demand, and that keeps the rates low?

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Am I wrong when I say the reason the percentage/coupon is so low is that the Bank of England is the party buying a lot of the Gilts as are the banks (by mandatory order) and that is what's creating demand, and that keeps the rates low?

Previously there was some truth to that but they stopped buying them quite some time back. Right now, it's fear and, to some extent, regulatory requirements. Some types of big investors are very limited in what they're allowed to buy (pension and annuity funds for example) and, with gilts at least, they reckon they'll get more of their money back than with the alternatives (investment grade corporates for the most part).

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Previously there was some truth to that but they stopped buying them quite some time back. Right now, it's fear and, to some extent, regulatory requirements. Some types of big investors are very limited in what they're allowed to buy (pension and annuity funds for example) and, with gilts at least, they reckon they'll get more of their money back than with the alternatives (investment grade corporates for the most part).

OK, thanks for putting me straight, I'm somewhat out of the loop it seems! :D

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Previously there was some truth to that but they stopped buying them quite some time back.

Really, so how are they maintaining the £200 billion of bond purchases? The £200 billion would have part matured, so they would have had to magic up some more cash to maintain the £200 billion?

Edited by Panda

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I saw today that a 5 year UK gilt will yield just over 1%. Even if they are considered ' safe' who in their right mind would buy them with inflation heading towards 5%?!

What could cause them to rise? I assume they have a major bearing on mortgage rates?

I'm not the most economically literate, so please forgive my naivety!

Thanks in advance

The madness of crowds and bubbles.

Investors (both retail and institutions) love to pile into the asset class with the worst fundamentals and pay the most for the privilege and get the least in return (and then lose the lot as the asset class crashes).

Stocks 2000.

Property 2007.

Government Bonds 2012.

Bubbles and losses will always arise.

Best stick to dividend defensive stocks earning 5-6% and on cheap valuations and gold.

Government bonds. One heck of a bubble. The bull run is probably the longest bond bull run in history having bottomed in price in 1981. All it needs is a small pin and this bubble is going to crash big time.

As James Montier says -

'Government Bonds Speculation not Investment'

http://www.rightsidevalue.com/2009/01/bonds-speculation-not-investment.html

"From my perspective as a long-term value-orientated investor, bonds simply don’t offer any value. They already price in the US slipping into Japanese-style prolonged deflation. However, they offer no protection at all if (and it may be a big if) the Fed can succeed in reintroducing inflation (what Keynes described as the “euthanasia of the rentier”). There may be a ‘speculative’ case for continuing to hold bonds, but there isn’t an investment case."

"I tend to view the world through the lens of a long-term valueorientated absolute-return investor. Albert is often more willing to tolerate momentum driven shorter term positions (believe it or not!). Perhaps it is these differences in approach that have lead to us to adopt different positions on the merits of holding government bonds."

"Of course, there maybe a speculative case for buying bonds. If the market is myopic (which is almost always is) then poor short-term economic data, and the arrival of outright deflation could easily see yields dragged even lower. Thus riding the news flow may be a perfectly sensible but nonetheless speculative approach. However, I am an investor not a speculator (as I have proved myself to be appalling at the latter), thus government bonds have no place in my portfolio."

"If the alternative scenario comes to pass and the Fed successfully reintroduces inflation (leading to what Keynes so vividly described as the euthanasia of the rentier) then bonds look distinctly poor value, thus the risk is exceptionally high and skewed in one direction. As Jim Grant so elegantly put it government bonds may well end up being 'return free risk' (as opposed to their more normal nomenclature of risk-free return). If yields were to rise from 2% to 4.5% investors would stand to suffer a capital loss of nearly 20%."

“An investment operation is one which, upon through analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” -- Benjamin Graham

Edited by ringledman

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people arent buying bonds as an investment. as the OP mentioned, you are losing money given that inflation is at 5%.

bonds are where you store cash in large amounts.

if you have £100,000 you can stick it in a high street savings account.

if you have £100 million you need to buy bonds.

it is the most liquid market for cash, held in the billions rather than the 1000's, because its the only place you can be (almost) 100% sure you will actually get your money back, whatever happens.

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Really, so how are they maintaining the £200 billion of bond purchases? The £200 billion would have part matured, so they would have had to magic up some more cash to maintain the £200 billion?

The stuff the BoE bought mostly doesn't mature for a few years from what I recall. It's possible they're topping up the stuff that does of course. The DMO has this breakdown:

http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/gilt-holdings-data-historical.xls&page=publications/quarterly

Looking at the BoE's holdings, they are actually falling a bit, presumably through maturity:

2010 Q2 200,368,000,000

2010 Q3 205,891,000,000

2010 Q4 199,234,000,000

2011 Q1 194,893,000,000

With the data only going to Q1 2011 and being 3 month lagged, it's not possible to tell who's been buying the most this year. Mostly, I'd suspect banks (who are still raising their capital levels) and pension funds who, demographically speaking, have to keep expanding.

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The stuff the BoE bought mostly doesn't mature for a few years from what I recall. It's possible they're topping up the stuff that does of course. The DMO has this breakdown:

http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/gilt-holdings-data-historical.xls&page=publications/quarterly

Looking at the BoE's holdings, they are actually falling a bit, presumably through maturity:

2010 Q2 200,368,000,000

2010 Q3 205,891,000,000

2010 Q4 199,234,000,000

2011 Q1 194,893,000,000

With the data only going to Q1 2011 and being 3 month lagged, it's not possible to tell who's been buying the most this year. Mostly, I'd suspect banks (who are still raising their capital levels) and pension funds who, demographically speaking, have to keep expanding.

Thanks, be interesting to see the 3 month lag results.............

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Way too much money chasing too little opportunity. NIRP will eventually force that too much money out spending in the economy. Or it will destroy over time the value of the money, allowing more real opportunity for future earnings.

The ideal scenario is where some developing nations are at now, huge opportunity and not enough capital. So competition between projects for the available capital by offering more attractive returns.

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The stuff the BoE bought mostly doesn't mature for a few years from what I recall. It's possible they're topping up the stuff that does of course. The DMO has this breakdown:

http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/gilt-holdings-data-historical.xls&page=publications/quarterly

Looking at the BoE's holdings, they are actually falling a bit, presumably through maturity:

2010 Q2 200,368,000,000

2010 Q3 205,891,000,000

2010 Q4 199,234,000,000

2011 Q1 194,893,000,000

None of the gilt holdings in the BoE's Asset Purchase Facility have yet matured (the first maturity will be in 2013).

The reason for the differing values above is that that APF holdings are being marked to market at the quarter end. Right now with the 10-year yield at c. 2.64% the value of gilts in the APF is considerably higher again – somewhere around £212bn.

The APF is also receiving dividend payments from the gilts. Currently there's something like £15bn in cash sitting in the fund.

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None of the gilt holdings in the BoE's Asset Purchase Facility have yet matured (the first maturity will be in 2013).

What does this mean in practical terms - at what stage do we need to go to the market for bond buyers, or can we simply keep on buying our own ad infinitum?

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They can literally print year in year out till eternity, its like Paul Daniels quotes "thats magic"

No they can't - in that scenario, ultimately the FX markets will decide that sterling is completely worthless and that will send the price of anything imported through the roof. Still, it's not like we import essentials like food or energy. Oh .... wait .....

The bottom line is that you can't consume more than you produce on a longer term basis. You can totally debase the currency at the very end to buy yourself a little more time (vs. an upfront default).

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Trying to understand this...

No they can't - in that scenario, ultimately the FX markets will decide that sterling is completely worthless and that will send the price of anything imported through the roof.

Is that what's happening now, with price inflation of e.g. food and energy skyrocketing (with our government and the BOE lying through their teeth when they talk vaguely about "wholesale prices" being responsible; nothing to do with "real" inflation..).

Then...

The bottom line is that you can't consume more than you produce on a longer term basis. You can totally debase the currency at the very end to buy yourself a little more time (vs. an upfront default).

'it's not about the return on the moeny but the retrun of the money' denninger I think

That, and since some are forced to hold AAA rated bonds, suggests to me that the bondholders' priority is not, actually, the yield, but simply getting the money back.

So if you're looking to buy bonds now, you probably wouldn't be interested in some of the Eurozone countries. Even the US looks somewhat shaky. There are the emergent economies where the growth is going to come from, so they ought to be a safer bet.

Except that they tend to be run by dictatorships in a more anarchic fashion, and bondholders fear that and instability.

Therefore, at the present moment, the UK is seen as a "safe haven". Doesn't mean the yield is any good, though.

And if the remaining dynamics above stayed true, then regardless of how much the UK prints, UK bonds will still be bought even if the yield is negative.

Is that in any way accurate?

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The present negative yield situation is by no means unprecedented.

For example, in 1932 the Bank of England reduced Bank Rate to what at the time was considered the absolute floor: 2%.

Bank Rate remained at 2% for over 19 years (apart from 2 months in 1939). Short-term interest rates stayed around 1% or below for 20 years (again, 1939 was the only exception). Long-term gilt yields were in the 3%-3.5% range for most of this period.

Over those twenty years inflation averaged 4.5% p.a.

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Trying to understand this...

Is that what's happening now, with price inflation of e.g. food and energy skyrocketing (with our government and the BOE lying through their teeth when they talk vaguely about "wholesale prices" being responsible; nothing to do with "real" inflation..).

Then...

That, and since some are forced to hold AAA rated bonds, suggests to me that the bondholders' priority is not, actually, the yield, but simply getting the money back.

So if you're looking to buy bonds now, you probably wouldn't be interested in some of the Eurozone countries. Even the US looks somewhat shaky. There are the emergent economies where the growth is going to come from, so they ought to be a safer bet.

Except that they tend to be run by dictatorships in a more anarchic fashion, and bondholders fear that and instability.

Therefore, at the present moment, the UK is seen as a "safe haven". Doesn't mean the yield is any good, though.

And if the remaining dynamics above stayed true, then regardless of how much the UK prints, UK bonds will still be bought even if the yield is negative.

Is that in any way accurate?

If you haven't met Scepticus, may I introduce you.

http://www.housepricecrash.co.uk/forum/index.php?showtopic=167478

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The present negative yield situation is by no means unprecedented.

For example, in 1932 the Bank of England reduced Bank Rate to what at the time was considered the absolute floor: 2%.

Bank Rate remained at 2% for over 19 years (apart from 2 months in 1939). Short-term interest rates stayed around 1% or below for 20 years (again, 1939 was the only exception). Long-term gilt yields were in the 3%-3.5% range for most of this period.

Over those twenty years inflation averaged 4.5% p.a.

I'm not sure that I can keep up the mouth foaming for 20 years. I'll probably be dead by then.

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If you haven't met Scepticus, may I introduce you.

http://www.housepric...howtopic=167478

Thanks :)

So when I posted this:

http://www.housepric...dpost&p=3075740

The very last part of that - is that where we are headed, in that you earn money if you borrow from a bank, but you're charged to deposit money (which indeed you'd have to do in order to have somewhere to pay back the loan from, so the route the banks take to making money simply flips around the other way - most profit is made on deposits, not loans as now - loans being a nuisance because people can't be forced to take them out, but people can be forced to deposit - drinks all round!)

e,g. NIRP is at a "country" level, if you like, but eventually, will apply to individuals as well.

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The reason for the differing values above is that that APF holdings are being marked to market at the quarter end. Right now with the 10-year yield at c. 2.64% the value of gilts in the APF is considerably higher again – somewhere around £212bn.

The APF is also receiving dividend payments from the gilts. Currently there's something like £15bn in cash sitting in the fund.

Ah, that explains it then. Interesting that they keep the 15B around rather than sending it back whence it came (i.e. from nowhere).

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  • 337 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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