Financial Times says Quantitative Easing sparking fears of bond dumping

WTF?_2

Could the 'bond bubble' be about to pop?

http://www.ft.com/cms/s/0/b9dc3ecc-f95d-11dd-90c1-000077b07658.html

Fears grow over investor flight

By David Oakley and Chris Giles

Published: February 13 2009 04:37 | Last updated: February 13 2009 04:37

As the Bank of England prepares to crank up the printing presses to expand the money supply, the risks have rarely been higher.

Critically, the health of the British economy may now rest on international investors who hold about £200bn ($286bn) – or a third – of UK debt in the form of gilts.

If these investors, including the Chinese and Japanese governments, Middle Eastern sovereign wealth funds and an array of international pension and life insurance funds, pull out of Britain, the government has a serious problem.

At the very least, as the Bank’s inflation report noted this week, some of sterling’s recent fall “is likely to reflect a rise in the sterling risk premium”. This “means that investors will tend to require a higher return for holding sterling assets”.

A gilts strategist at a leading bank said: “We are not yet at this stage, but if overseas investors started to take a view that the UK economy was just too great a risk, then they could create deep problems.

Not looking good for the Masterplan, Gordon.

The big question is, will he be so stupid and arrogant as to go ahead anyway? My guess is yes.

Generali

It'll all end in tears. You can't just print money and you certainly can't while expecting bondholders to keep on buying. Deflation is good for bondholders. What do investors in the middle east care about whether the price of your house drops?

purch

It'll all end in tears

That's for certain.

Nobody really knows what the outcome of this will be, but I think just about everyone knows it is unlikely to be a good outcome.

Rochdale_Pioneers

Well if we need to spend a vast ocean of cash to prevent the banks imploding (£13tn across the EU was mentioned in the press) then we either all borrow the money or we let the banks collapse and with it our entire economic system. Those of you advocating doing nothing surely must realise that this would be catastrophic for the free market system you espouse?

But - what i have warned about for a while is the free availability of cash to fund these rescues. The EU needs £13tn. America needs $1tn - is that kind of money available from investors elsewhere? And don't they have their own economies to prop up - China keeps being mentioned as a source of investment but they've had to devalue the yuan as their own growth bubble has popped.

WTF?_2

purch wrote: »

That's for certain.

Nobody really knows what the outcome of this will be, but I think just about everyone knows it is unlikely to be a good outcome.

Rubbish! It is right to protect the interests of hard working British families in this global crisis which started in the United States. Better to provide British jobs for British workers than stand by and be the do-nothing party .... err ...... er .....

Masomnia

Isn't one of the points of quantitative easing that the BoE buys the government bonds, increasing the price of them, so that the banks lend money out rather than invest in bonds?

Radiantsoul

Masomnia wrote: »

Isn't one of the points of quantitative easing that the BoE buys the government bonds, increasing the price of them, so that the banks lend money out rather than invest in bonds?

I think it is commercial paper that is purchased so as to reduce the price and lower the spreads between government debt and commercial debt.

Sir_Humphrey

If they sell bonds, what do they buy?

Thrugelmir

!!!!!!? wrote: »

Could the 'bond bubble' be about to pop?

http://www.ft.com/cms/s/0/b9dc3ecc-f95d-11dd-90c1-000077b07658.html

Not looking good for the Masterplan, Gordon.

The big question is, will he be so stupid and arrogant as to go ahead anyway? My guess is yes.

For clarity, Gilts are not bonds (in the UK by definition). Bonds are issued by Companies, Building Societies, Finance Houses etc to secure long term debt.

The Governement issues billions of pounds of Gilts every year to fund the PSBR. Normally the BOE auctions off gilts by a tender mechanism. Without getting into technicalities the best bids win. The market determining the interest yield and yield if held to maturity.

Now that GB needs to raise £120 billion or so next tax year . The market will determine the risk premium and send yields higher. Ultimately this will result in far higher BOE base rates once the commercial banks deleveraging process is complete.

Thrugelmir

Sir_Humphrey wrote: »

If they sell bonds, what do they buy?

Treasury sells gilts yielding say 5%, buys back high quality commercial corporate bonds yielding 12%.

Sir_Humphrey

Thrugelmir wrote: »

Treasury sells gilts yielding say 5%, buys back high quality commercial corporate bonds yielding 12%.

Corporate bond yields are higher owing to higher risk. In a deep recession, the value of the corporate bonds would fall. If the government were foiled in it's attempts to support the economy, and we enter a full-blown depression, then would corporate bonds be a good place to be?

There is a circularity in this argument here too. If govt gilts get more risky, then surely their yield would rise, undermining the reason to sell them.

I do not claim much expertise on this.