Tuesday, July 28, 2009

Gilt yields irrelevant

To make matters worse, foreign investors, which own about one third of UK government debt, could also be drawn away as the pound falls,

"To make matters worse, foreign investors, which own about one third of UK government debt, could also be drawn away as the pound falls,"(sic)(as the already fallen pound continues to fall). Does anybody think foreign investors care if gilt yields are 3.5 or 3.7 when the currency they are denominated in has fallen by 25%, and the incumbent government clearly wish to devalue going forward.

Posted by stillthinking @ 10:47 AM (1502 views)
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12 thoughts on “Gilt yields irrelevant

  • So the QE was nothing of the sort, most of the money was just passed off the books over to the banks so that they could re-capitalise.

    Should we expect the painfully long awaited IR rises now ?

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  • general congreve says:

    No way out. IR’s rise to attract failing foreign investment in gilts and support sterling, mortgage rates go up as a result and the resulting acceleration in mortgage defaults pushes the banks closer to the edge of insolvency, so more QE is needed to stop them going bust, more investors sell gilts as a result, IR have to go up again, and so on…

    We are trapped in some sort of economic death grip, are we not? Whatever the govt. does it will undermine the economy and therefore sterling. It should have just let the banks collapse, only offering to guarantee deposits where necessary. I’m sure it would have been cheaper and got the bulk of the problem over with in a flash.

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  • Agree 100% with your comments [email protected]

    This country is well and truly stuffed.

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  • Materialistic Weasle says:

    Don’t see the goverment allowing the IR to go up before the election so there’s eight months, then when the next lot return thew will lift it so slowly to avoid rioting it will be at least three years before we return to normal rates.

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  • gc

    Agreed, I don’t know the extent of the bailout for deposits.

    Personally although the limit at the time was £35k later increased to £50k I feel all depositors money should be safe no matter how much they have in an account.

    If they’d spread it between 4 accounts (assuming they had 2-300k in cash savings) the tax payer would still have had to cover it.

    This ‘savers’ money is REAL money and should have been bailed.

    It may have taken a while to set up new banks, but I suspect the above would have ultimately cost less and taught a lesson to those in banking.

    All we seem to have done is reinforce delinquent and irresponsible behaviour on the part of the banks. In fact I’d go further and suggest the government are encouraging it at present.

    If they’d let the banks go we’d be at or close to the bottom by now, where as now we could be facing several years of decline now, despite the current wave of ‘green shoots’ and good news.

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  • stillthinking says:

    Not letting the banks fail was a big mistake. I think that the government can’t do so much because even if they do reduce borrowing requirements by slashing the state sector (something I am in favour of), that itself takes money out of the economy because what will those state workers do? The time to cut the state is during the expansionary part of the cycle. Alas too late.
    But I don’t see IR rates rising to attract foreign investment. This makes me wonder about Japanese gov. debt being held by their own population. Often that is presented as though the Japanese were so keen to buy government debt that foreign buyers didn’t get a look in. But maybe the reason that J gov debt is held by the population at large is because nobody else wanted to buy in.
    Lest we forget domestic purchases of UK gilts are -legally- mandated for pension funds, insurance funds. Very similar to Argentina when the government confiscated (borrowed) the pensions and later turned out incapable of returning. Domestic purchasers are different, because the government borrows 100 from the population, then spends it on the population, then borrows it again from the population, so its a closed loop, the same money can go round and round but the outstanding gov debt gets larger and larger. So the recycling aspect seems to ensure that the gov can always access funds and increase debt, legally mandated after all, but the problem is that at some point they cross the line of future paying back ability.
    I see it like this. I have a 10 squids and I am a population of 1, there is also a government of one person. So just two people in the world, and just 10 squids. The government borrows the 10 squids off me,fine, they then pay me to do some work, fine, I have the 10 squids back and also the gov. owes me 10 squids. Then they borrow another 10 squids, pay me again, so now I still have the 10 squids, but I am owed 20 squids. Rinse and repeat forever.
    So I think debt can be domestically funded forever pretty much. But the paying back failure is something that happens in the future, and is slightly unknown. However, even if I know that the government have gone way past the ability to repay, if I am legally mandated to lend, then the recycling can continue and continue (ponzi basically). In the UK we are legally mandated to lend because all workers have to join some kind of pension funds (or most are anyway) and that legally has to go into gov debt, same for car insurance, home insurance, and many other purchases that are either mandatory or unavoidable.
    If goverment spending was productive, then no problem, i.e. they owe me 30 squids but paid me to produce some useful asset worth 30 squids which they can sell to me, basically this is just social organisation of labour. All well and good. The problem is that government spending is cack and they end up with people nominally working but without any useful production, ie the government ends up with debt but without assets. The way out of this is to reduce the debt with taxation.
    The country isn’t necessarily stuffed but we are on the waste of time digging holes for no reason economy.

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  • When QE was first introduced, I likened it to financial Crack Cocaine – once started, it would be very difficult to kick the habit.

    The BOE has probably been talking to the ratings agencies to see how far they can go without tripping a downgrade; and the decision to halt QE was probably prompted (at least in part) by the knowledge that the UK was on the brink. The BOE has also published some theoretical models that indicate a relatively low risk of inflation taking off if QE is limited to £125bn. It may well be that a higher level of QE gives a much less rosy outlook.

    Our Merv would not want history to record that a decision of his triggered a sterling crisis, so his preference is likely to be to sit tight, and let nature take its course.

    Who has the cash to buy the new issuance of Gilts? Recent history indicates that the increase in government debt has been quite consistant with the increase in foreign ownership; in other words, domestic ownership of Gilts has changed very little.

    It is hard to see foreign investors having much appetite for them now, unless the returns are much better. That implies rising interest rates, which the current government will be very anxious to avoid in the run-up to the election.

    So Brown & Co. might order the BOE to resume QE; in which event our Merv could either take comfort from having only obeyed orders, or have the perfect excuse for an honourable resignation.

    If the UK’s credit rating gets downgraded, then there lies a very big problem, in that many overseas central banks who own Gilts would find that they were no longer compatible with their remit for investment.

    No-one seems quite sure how many would then be dumped on the market, or how quickly; but the consequences might be spectacular..

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  • well said general,

    agree, we are stuck in a downward spiral and there is simply no way out until they stop the excessive printing of money that we have seen over the last 4 decades.

    at the moment we are reaching breaking point and will probably see an acceleration into the black hole of infinite money supply.

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  • matt_the_hat says:

    stillthinking can you explain “-legally- mandated for pension funds, insurance funds”

    i.e. what is the exact wording of this law of investment

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  • mountain goat says:

    Devaluation of GBP is the solution. The problem is that wages and housing are too high versus producer nations. Why should we earn 10x as much as someone in India or China for doing exactly the same job like being a taxi driver? Wages cuts are politically impossible. If house prices fall too quickly it means too many insolvencies of home owners and banks. So it will be slow managed devaluation over many years with QE being the accelerator and falling GBP and rising interest rates being the brakes. This will not be a downward spiral of the UK. No exactly the opposite, devaluation will allow us to get off our fat debt ridden ar$es and compete in the world’s market place again.

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  • stillthinking says:

    “Buyers were “primarily” domestic pension funds, insurance companies and fund managers, according to the debt office’s Web site.”

    title of the article – “U.K. Sells 5 Billion Pounds of 33-Year Inflation-Linked Bonds ” date 23rd July 2009


    I don’t know the exact law… All I can say is that my general impression from things as they are reported is that pension funds, etc are forced to buy government debt because government debt is the safest. i.e. they can hold some risky assets but to ensure that they are safe (…) they have to hold government debt irrespective of yield because it won’t default.

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  • tenyearstogetmymoneyback says:

    stillthinking @5. I like the analogy. However, the thing that you have ignored is inflation which is what mountain goat @ 9 suggests.

    Once the person is owed £50 you tell them “Sorry thats not worth very much now”
    Where that doesn’t work is dealing with Foreign countries who can pick and choose
    who they deal with . How much trade is there with Zimbawe these days and can they
    trade in their own currency. Last thing I heard even the Zimbawe Government was allowing trade in
    US Dollars as their own currency was untradable.

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