Thursday, September 30, 2010

One hell of a bubble…

Gilts see record international buying

''International investors are buying record amounts of government bonds amid rising expectations that the Bank of England will start printing money again to kickstart the faltering economic revival. Gilts are also benefiting from their status as safe investments in times of stress as fears grow that the eurozone debt crisis may deepen and the world could be plunged into a double-dip recession. The latest data on gilts was published 24 hours after a leading member of the Bank of England’s Monetary Policy Committee urged a restart of quantitative easing, turning on the printing presses to buy gilts, because of concerns over economic growth.''

Posted by hpwatcher @ 08:25 AM (1524 views)
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21 thoughts on “One hell of a bubble…

  • This is the important bit:-

    Mr Wraith said: “There is a point when too much QE risks having a negative impact on gilts as investors may increasingly suspect the Bank is trying to inflate away the debt. Some international investors may also see it as an opportunity to sell once QE starts as the market peaks ahead of the move, a dynamic that was in clear evidence first time around.”

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  • Well, that’s another printing press being wound up for the big printout.
    The US has been doing QE on the QT since April. The ECB was buying euros furiously yesterday. Bit of an odd world when you can’t give Ireland stabilisation funding because that would destabilise the markets.
    Ireland is a mess, and it’s being made worse by Tricky Trichet: the Irish are being sacrificed to EU stability. It’s a disgrace.

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  • With inflation already above target, a clear indication from Bean that they don’t care about savers, why are people loading up on gilts ?

    Surely you get back the same (worth less) cash you invested after the term.

    Are interest rates payable linked to CPI or RPI ?

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  • Good point str. However, some are inflation adjusted. But, the thing is that people are being driven into them, because other investment opportunities are now so limited.

    But, I still think them very risky, what if we enter an age of govermneht defafaults?

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  • slartibartfast says:

    I don’t get the logic of foriegners buying guilts, knowing the currency is about be devalued.

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  • The index linked gilts are no longer being issued; as per decision made a couple of months back.

    The rates do not directly reflect anything other than the lowest rate bond buyers will tolerate for that country. So it is that different countries have different rates for a ten year bond. Greece may be 13% and Germany may be 4%.

    It comes down to credibility. The UK has never (yet) defaulted though it has gone cap in hand to the IMF in the late seventies.

    The rate we are currently getting reflect (I think) a reduced likelyhood of default after the demise of Gordon Brown and the phoney austerity of the coalition. In other words the tax payer is paying a lower interest rate because the bond market believes the government is being sensible.

    QE is an interesting one. I suspect the market view is that a small amount is an irrelevant political sweetner and a large amount will damage the real value of bond holder capital. So far the noises suggest the former.

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  • hpwatcher (Thursday, September 30, 2010 09:08AM) I appreciate it is your personal perception however according to CII,IFS and Taxbriefs “As with Gilts, treasury bills are considered to be very low risk securities. The risk of default is low enough to effectively be Zero, since the government is the borrower”

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  • confuses the hell out of me – I would have thought that QE would have been a very good reason to dump gilts and run for the hills. That’s where my money is.

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  • hpwatcher (Thursday, September 30, 2010 09:08AM) I appreciate it is your personal perception however according to CII,IFS and Taxbriefs “As with Gilts, treasury bills are considered to be very low risk securities. The risk of default is low enough to effectively be Zero, since the government is the borrower”

    The issue for me is that investors are usually bidding against central banks – QE again – to buy the bonds; so the price is being kept artificially high. Moreover, the return on bonds is effectively diminishing due to inflation.

    But I still maintain, that soon there will be governments defaulting on debts, this will be the next phase of what has been called the greatest depression.

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  • hpwatcher – interesting view, and leading on from this where would you then risk rate the other basic asset classes (I’ve penciled in Gilts as you have already deemed them “very risky”)

    Cash (Bank deposit)
    Gilt/Fixed interest – very risky
    Corporate Bonds
    Equities
    Commodities

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  • hpwatcher – interesting view, and leading on from this where would you then risk rate the other basic asset classes (I’ve penciled in Gilts as you have already deemed them “very risky”)

    Cash (Bank deposit)
    Gilt/Fixed interest – very risky
    Corporate Bonds
    Equities
    Commodities

    I recently read an article about how government debt is starting to have quite a crippling impact on various governments – I think the article mentioned Ireland, though I would need to check to be sure. Going forwards, I can see it become more and more of a burden, soon they will be borrowing from Peter to pay Paul.

    Of the list you have provided, nothing is 100% safe, it’s a question of what is less risky. I think I would go for a mix of cash and commodities – and cash would cover a number of currencies.

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  • hpwatcher – many thanks for the response

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  • general congreve says:

    I think a lot of the buying of gilts, despite the obvious default risks, comes from institutional investors who we credit with far more knowledge or common sense than they deserve. One poster recently posted a youtube link to a professional investor lecturing Russian Bankers on the crisis we face. A large part of his lecture was on how fractional reserve banking works! If they need to know that, it’s no wonder these mugs are buying gilts and bonds.

    Go…. Go… No, I’m not going to say it. Oh alright then…

    Got Gold?

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  • There seems to some confusion about this. There are a couple of reasons why a hint of more QE could lead to gilt buying

    1.Gilts are considered a safe haven in times of stress. Any hint that the BOE are considering more QE suggests that govt. forecasters might be predicting a ‘time of stress’. The suggestion of more QE might therefore cause a mild rush to buy gilts. If this suggestion of more QE does indeed cause a mild rush to buy gilts then the govt. would not have to buy so many gilts themselves (which is how they have chosen to implement QE).
    2.By design, QE drives down yields, so gilts bought before the implementation of QE will theoretically have a higher coupon than gilts bought during the implementation of QE. If you believe that there might be more QE, it therefore makes sense to buy them now

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  • general congreve says:

    @14 – Sound reasoning, doesn’t make those buying gilts any less stupid though!

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  • Good to see you’re still about Flashman.

    Are Gilts actually any better than getting a couple of % in a bank account or are we splitting hairs ?

    Any chance of a Flashman Economic Forecast for the months ahead ?

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  • “Are Gilts actually any better than getting a couple of % in a bank account or are we splitting hairs?”

    As is always the way, the better interest rate is accompanied by more risk. It is therefore a matter of choice and calculation

    “Any chance of a Flashman Economic Forecast for the months ahead?”

    No chance! but I will say that most of the predictors of dire recession seem to pointedly ignore one vital ingredient, which is the vigorous aggregate world growth we have been experiencing. The aggregate world economy never stopped growing during the finacial crisis, which rather mocks the ‘great depression’ tag. The UK economy may be a little arthritic but it is still large and sophisticated enough to at least partially benefit from world growth. In any case, arguing between mild growth and double dip is a little bit pointless because only a couple of percentage points is likely separate the two. Champions of both scenarios are therefore claiming to have an unfeasibly well calibrated forecasting ability (almost a year ago, I predicted that we would see a few quarters of consecutive growth because it was an easier prediction at that time). It often strikes me that going forward, fans of both scenarios are indulging in little more than football supporter style chanting. The oft-touted question of whether or not we get a double dip recession should now, in my opinion, be considered redundant. It might reasonably be argued that after almost a year of growth (and maybe more to come) it would be a new recession, in a new environment, rather than a double dip related to the old environment. Every one of ‘our’ forecasters of the fabled double dip gave a timeline that is long gone (most claimed we would not actual see growth at all), so it is not credible to sit tight and claim to be right if, sometime during the next few quarters/years there is another recession. Even if we do slide back into a technical recession (perfectly possible) it is likely to be mild and short lived because of the aforementioned aggregate world growth. If you want a ‘flashman forecast’ I would say that it is so finally balanced at the moment that there is little point in prediction. I would qualify that by adding that, in my opinion, growth or recession will be so mild that, either way, there is nothing to get hot and bothered about.

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  • Thanks Flashman

    I guess it could also be argued that the next recession (should it happen) would be a direct result of kicking the can down the road during the last.

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  • Fleeting visit flash or are you back awhile? How was the trip on the bike?

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  • hello techie. I don’t know if it will be fleeting or not. That’s harder to predict that the economy. My event went well- thanks for asking. It almost did for me but I managed it. Already planning on going back next year for another crack at it.

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