Thursday, March 26, 2009

Scary Gilts Issuance Graph

Gilt Strike

"Yesterday's failed auction of 40 year gilts underlined a few ghastly truths we may possibly have mentioned once or twice before. Let's start by asking whether you would be prepared to lend to the UK government? Right here and now. Today. In particular, would you lend the government money at a fixed interest rate of 4.25% for 40 years?" Now check the first graph. If this article is half correct then we are in big trouble.

Posted by quiet guy @ 10:23 PM (1031 views)
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6 thoughts on “Scary Gilts Issuance Graph

  • A single day’s actions aren’t really much to go by. Wednesday’s auction failed, but Thursday was fine again.

    Reuters: Relief after strong gilt auction demand
    LONDON (Reuters) – Britain got strong demand at a gilt sale on Thursday, reassuring Chancellor Alistair Darling after the previous day’s failed auction, as investors favoured the bond’s shorter maturity and inflation protection.
    The head of the DMO* Robert Stheeman, told Reuters after Wednesday’s auction that individual failures were always a risk, but he would be concerned if there was another one.

    (*DMO = Debt Management Office, part of the Treasury)

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  • Drewster,

    Let’s hope you are right however I have to point out the last paragraph of my post:

    “PS Today’s gilt auction was much more successful. But that’s because it was an issue of index-linked gilts – ie inflation protected.”

    Or an extract from your post:

    “Britain got strong demand at a gilt sale on Thursday, reassuring Chancellor Alistair Darling after the previous day’s failed auction, as investors favoured the bond’s shorter maturity and inflation protection.”

    That’s my point. Wednesday’s gilt sale was not inflation protected and it failed i.e. you are not comparing like with like.

    Time will tell.

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  • qg,

    Fair points. I didn’t read the detail closely enough.

    The index-linked gilts are linked to the RPI. So with these auctions, the markets are saying that they don’t trust the government to not inflate away the debt, but they do trust the government to not fiddle with its RPI figures. I thought the bond markets were supposed to be very clever?

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  • Drewster,

    Spurred on by your comments, I decided to dig a little deeper into this story.

    the main reason given by commentators for the gilt failure seems to be that 40 year bonds cannot be sold back to the Bank of England, taking advantage of the quantative easing scheme. Implicitly, investors are buying bonds with 5 – 25 year terms with the intention of selling them back to the Bank of England, if I’ve understood this correctly.

    http://uk.mobile.reuters.com/mobile/m/FullArticle/eUK/CBUSUK/nbusinessNews_uUKTRE52O3RS20090325
    http://www.iht.com/articles/ap/2009/03/25/business/EU-Britain-Government-Finances.php
    http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/03/gilts_and_innocence.html

    So regarding your first comment, fair enough. Perhaps the sky isn’t going to fall on our heads (yet!)

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  • stillthinking says:

    The BoE are shifting the maturity around. They can’t sell long dated, as is apparent, so they are stuck offloading pre-2015 maturities. What is not yet apparent is that although currently gilt issuance looks smooth and regular, due to having to rollover the debt the maturity date should also be smooth and regular
    .
    But it doesn’t seem to be. There is a clumping forming around short term maturities, reasonably enough as attractive to investors who want to look at the cow so to speak.

    To say that demand for government debt is holding up is misleading, overall I am not sure that is true. The collapse in demand for long dated is showing up as increased demand for short dated, despite legislation enforcing insurers/pension funds etc to buy long term gilts.

    Overall, as in considering all maturity dates together, I am not sure demand is holding up as people say, irrespective of flight to safety. Anyway, the big problem, which has been delayed, is that when we get to the clump of maturites the UK will have to rollover an indigestible amount of debt driving up yields.

    Further, that the BoE is offering a buy-back service, allows investors to move their choice of gilts around. As in, they can shorten their choice of maturity date by selling whichever is the longest gilt they hold to the BoE and then stepping back in to purchase short term. So the banks plan to lower long dated yields doesn’t work.

    This is my impression from the articles I have read. I think the bond market are looking at the government like loan-sharks, they don’t want to buy low yields, they want to buy high yields and they are positioning themselves for this possibility coming with ~5 years.

    @qg, to take advantage of the high yields coming, the investors must have freedom to purchase on more beneficial terms, so whether they buy short term -or- they buy longer but under the BoE exchange scheme, they still have liquidity. That is why, I think, Mervyns comments about committing the full amount of quantitative easing spooked them, because he was guaranteeing the liquidity of slightly longer than short dated (!) gilts. The reason the BoE has put the buyback in place, IMO, is to act as a brake on the collapse to shorter dated securities.

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  • stillthinking says:

    Put it another way, how do we know that the public announcement to pump money in through qe was genuine? The stated intent was to provide additional money and encourage lending.

    But, another explanation would be stop a collapse in the gilt market by saying to investors, don’t worry because there is a guaranteed market and you can get out when you like. However, if that explanation is true, then it hasn’t worked, because instead of feeling confident and staying in, the investors are already spooked and already using the exit. In support of this is the fact that Mervyn King is talking of withdrawing the agreed amount of qe, which is a natural response because it didn’t work to support the market. I.e. the qe was there as a bluff to hold up confidence only.

    Further, that the long term gilt auction failed is a very big thing, and not the small “one auction doesn’t matter so much” that we are presented with in the media.

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