Wednesday, May 6, 2009

Why you should be worried about the bond market

Why you should be worried about the bond market

With stock markets on a tear, investors have been distracted from a potentially dangerous development in the bond markets that could be disastrous for both the economy as a whole and for anyone carrying any debt...

Posted by damien @ 02:45 PM (1063 views)
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6 thoughts on “Why you should be worried about the bond market

  • The article concludes that interest rates are going up, fairly soon.

    Does anyone know how rising interest rates will affect the SVR of lenders such as Halifax? Its currently 3.5%. Will a 1% rise in IR increase it by 1%.

    Is it worth moving from 3.5% SVR, now, to lock in a fixed 4 year deal at around 5% ? Any ideas?

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  • Why should interest rates go up? Japan kept its rates close to 0% for nigh on two decades. If the BoE keeps buying up gilts then rates can stay low indefinitely.

    Presumably the risk is a buyers’ strike – that foreign investors get sick of bailing us out and demand Argentina-style 70% bond yields (serious – see Daily Reckoning for details of the 70% yield on Argentinian peso bonds). Just how big a risk is this, in the UK?

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  • Drewster,

    “Japan kept its rates close to 0% for nigh on two decades.”

    Japan had a relatively healthy economy and a savings habit that is somewhat lacking in the UK. I’m sure you’re right that the government would like to keep rates low but it’s unclear if they can stay sufficiently in control. Borrowing from the IMF might be the event that forces rates up.

    http://www.nytimes.com/2009/04/15/business/economy/15pound.html

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  • quiet guy,

    I’m playing devil’s advocate / bear-baiter. Thanks for the link – pretty much confirmed what we all already knew, that the UK’s finances are in a parlous state.

    From your link:
    “So far, investors have been willing to finance Britain’s debt at relatively low interest rates, unlike in countries like Hungary and Latvia, whose reserves have been drained, leading them to turn to the I.M.F. for support.”

    As I understand it, a gilt buyers’ strike is binary – either they are buying, or they aren’t. There doesn’t seem to be any middle ground. This means that there could be a sudden shock to the system instead of the slow changes that we are accustomed to. If it happened then our pounds would lose a lot of value overnight (in my above linked article, the Argentinian peso lost 2/3rds of its value). Scary, isn’t it?

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  • @4
    Shocks to UK gilts are rare (I hope I don’t have to eat my words for all our sakes). Most of the time they are used by pension companies and very wealthy investors as safe havens for their money. Normal guys like myself are covered with up to £50K in any one bank but GIlts are perceived to be essentially risk free.

    All that said, the yields look like they’re creeping up. Of course the massive issuance of more gilts by the treasury will mean hikes in the yields as other investors (those not looking for a safe haven) will need to be tempted into holding them. I agree a shock is not out of the question though, Risk is key to these large investors and even thefaintest whiff of a default risk by her maj’s govt would send them running, the prolem then would be where do they go?

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  • So if the pound loses value where would my money best be kept? gold? dollar? something else?

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