Saturday, January 31, 2009

Gilt auction failure

Surge in gilt issuance expected

If people with money thought that the UK gilt auctions would succeed, then there would be no reason for sterling to be as low as it is now, for the simple reason that foreign buyers must buy sterling to buy UK gilts. Also, the amount issued for each of the next few years is 150 billion a year, which is roughly the same as our trade deficit. This goes some way to explaining why the gilt market is being overhauled to allow more access to pension funds, the "core of our investor base" for gilts. So a) altering the structures to allow/force more domestic purchases b) low sterling. From that, there won't be any foreign buyers of gov. debt, only UK savers, in which case there is no real wealth behind the savings guarantees and -the gov. plan is simply that there will be no defaults-.!?

Posted by stillthinking @ 05:24 PM (1008 views)
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13 thoughts on “Gilt auction failure

  • stillthinking says:

    This line,
    “However, he noted UK banks were likely greatly to step up purchases of gilts of all maturities. The Financial Services Authority has proposed requiring banks to hold liquid government paper to meet liquidity rules in the wake of the meltdown in the asset- backed securities market.”
    from here, http://www.ft.com/cms/s/0/7a2cecd0-ed6a-11dd-bd60-0000779fd2ac.html

    seems to be an example of fraudulent double counting. Banks can lend money to the government, this process being buying gilt. As we know when banks lend money this is a balance sheet exercise and in fact, this money is created. Further, this won’t affect their net worth because gilts are so safe (la la) that they are the same as the money, ultimate deposit. So no change for the banks accounts, but then the government uses this money to place directly into banks capital, which is a net change. So, kind of (not even kind of…) this is the equivalent of ignoring capital reserve requirements.
    If you think about it, you might come to the conclusion that there is no government plan in place yet for recent events, just false accounting and a false hope that there won’t be any defaults. But there will certainly be defaults, we are in a global recession.
    I was looking at prices today in the shops and it occurred to me for a great many things, I could buy them in a normal shop, ship them over to Japan, and still manage to sell them for a profit, the idea of sterling being below purchasing parity suddenly becoming dramatically obvious. So at the moment the UK government -must- be regarded as much more likely to default than you ever read about in the UK media.

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  • This Gilts process sounds immediately inflationary. Banks have no choice but join in, now that they have been nationalized.

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  • Off-topic, but someone called Phil sent me a message via meetup.com earlier. I’m not ignoring your message, I’m on holiday in the Alps til next weekend so I won’t be able to reply til then. Thanks tho!

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  • Some guilt issuance needed by the banker/treasury folk.

    Gilts may be renamed ‘brown edged bonds’.

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  • drewster, that would be p4ac

    best not to have one in the alps

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  • From what I can see it looks like chaletpricecrash.ch 😉

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  • From what I can see it looks like chaletpricecrash.ch 😉

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  • drewster………

    Watch out! ……Avalanches can be caused by tumbling chalets.

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  • stillthinking says:

    great ignoring of my post going on…

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  • sincere apologies stillthinking…….rest assured it’s been read and digested. not really able to comment on a technical level,but understand your points.
    Regarding sterling…..seems to me protectionism is conveniently in practice here from those that condemn such practice.

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  • mark wadsworth says:

    Stillthinking, your first comment says it all. The cretinous government has to borrow money to bail out banks (which is miserably failed to supervise, or possibly even encouraged to lend recklessly) and it is also forcing the banks to “buy gilts’ i.e. lend it straight back to the government, so this is just taking the mickey.

    That the government is this stupid would be bad enough , but are they so stupid that they don’t realise that people will notice how stupid they are?

    But interest rate hikes look good to me. I just don’t see how they can go any lower, so it’s pretty much a one way bet if I could be bothered to reopen my account with the futures brokers, I’d just sell gilts short and come back in a year.

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  • stillthinking says:

    Mark, I think so too, I think perversely, interest rate hikes would be a good idea. Another conclusion is that there is no avoiding quantative easing, and something missed in the press, was that we went to the IMF before in order to avoid doing so.

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  • Ed Peterson says:

    Interest rate hikes would take us back to 1929 one of the three big mistakes made at the time and never to be repeated unless your stupid enough to repeat history.

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