Financial Times says Quantitative Easing sparking fears of bond dumping

Sir_Humphrey

Another thought. Since a lot of these Middle Eastern regimes require the West to prevent tham being strung up by Islamic Militant nutjobs, would they not be unwise to undermine the West too much?

Thrugelmir

Sir_Humphrey wrote: »

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.

Until recently the top graded bonds maintained a yield of around 2% above gilts. Though this has widened considerably over the past few months. By top grade you are looking at Companies with strong balance sheets and sound business models.

Companies use bonds to provide finance for capital projects. Without the access to long term loan finance from banks, Companies will need to issue more of this debt. So by buying the bonds in the market the Government is essence lending the money. Gilts will be sold to pension funds to counter balance the books.

The Government has to sell Gilts in any event to fund the budget deficit. Its the next generation that will pay the price of this. Politicians never talk about the long term.

StevieJ

napoleon wrote: »

Brown, stop this madness now. You're gambling with our children and even our grandchildren's futures. Just in a vain attempt to save your srawny neck at the next election

What a hackneyed phrase that is, as bad as hard working families.

zarazara

what a mess everything is.

Count_Dante

Everything looks worse and worse the longer we go on. Things unthinkable a couple of years ago become believable, and things that were believable have already happened. I reckon the economy will not recover in 2010, and we will be looking at nationalised banks, strikes and shortages.

dopester

!!!!!!? wrote: »

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

Oh no they won't. The market can withhold a trillion pounds faster than the BoE can get it printed.

In more advanced countries, the market is itself a potent deflationary mechanism. Politicians are stopped from inflating wildly away because people who have financial assets like bonds can sell them. For example, if it appeared to everyone that the U.S. government intended to rapidly inflate away the national debt, then most holders of U.S. Treasury bonds would dump them, driving up interest rates.

The effect would therefore be just the opposite of what the politicians would wish. The stronger the appearance that the authorities are following an inflationary policy, the higher interest rates will go, and thus the more rapidly capital will disappear.

This, of course, does not mean there cannot be hyperinflation in advanced countries, but it does mean the economic and political gains of such a policy are likely to be more than cancelled by its high costs. Indeed it is possible the attempt to counter deflation by political expedients has the effect of increasing the strength of impulse making for contraction.

Governments facing the need to finance massive structural deficits due to the slowdown in economic activity may find that the markets can set the price of funding high enough to offset any stimulative gains from inflation. If so, there will be no alternative to direct debt liquidation, and the second, deeper stage of depression.

Printing press money sounds like a trick that could keep the price of real estate high, and erode the value of insurance obligations, credit guarantees, and debt outstanding.

Most people would assume that the government will step up to bail out large debtors, an assumption that is closely linked to the assumption that debts will be wiped away by inflation. It is certainly possible that the Treasury would seek to cover its liabilities with Argentine money.

To holders of trillions in bonds, the threat of inflation devaluing their assets would be real. The market would adjust by demanding higher rates. Bond prices would fall. The economy might slip into even a deeper stall. Wealth would be driven into forms like coin hoards and gold that are not subject to repudiation by politicians.

For the Treasury to persist in inflating its liabilities in the face of troubles it will face in the downturn would amount to a conscious choice of inflation at Latin American levels. This is possible, but we have already indicated why the weight of probabilities favours a deflationary solution to the debt crisis.

I honestly don't know why you're so eager to see the high/hyper-inflation path !!!!!!. It is clear from previous posts you are on standby to buy a house, and leverage in to BTL.. for the "coming inflation" to see you whisked away to riches.

Were it to happen like that, I don't think multiple houses will save you, and doubt you or government would be able to enforce property rights or protect freedoms or laws generally. Someone or some group wants what you and your family has, they can take it by brute force - mouth on kerb-stone and stomp job.

And basic functions like food supplies and all you take for granted would be very challenged. Plus the external dark threats - which never went away despite us being "modern" now - a country in such disarray would be more open to.

Generali

Just to be clear, normally the mechanism for the UK Government to borrow money is that the Bank of England credits the UK Government's bank account with freshly created money. Usually that is offset by selling a Gilt (a UK Government bond) on a pound-for-pound basis. This is a process called sterilisation and is how bond sales don't increase the amount of cash in circulation.

Through QE the Bank of England will credit the UK Government's bank account with cash and then use that cash to either buy back Gilts in the open market or to pay back expiring ones. The fear if you're a bond holder is that by increasing the stock of cash, the Bank of England will increase the money supply and so you are being paid back with cash that is worth less than you were expecting when you bought the bond in the first place.

If you are a Gilt holder and you think that is a risk, what do you do to protect yourself? You sell the Gilts you are holding as fast as you can.

Some people are forced to by Gilts. Examples are UK banks (they effectively need to hold Gilts to hold in their reserves) and sellers of annuities (they are forced by law to buy long term Gilts to offset the long term liability they have for the annuities they've written). Some people are not forced to buy Gilts. These people may decide to sell or at least not buy more if they think their investment is at risk.

A similar thing happened in 1976 - the Labour Government had made promises to the unions in nationalised industries that it couldn't afford to honour when the economy headed south.

The market refused to take the bonds it was being offered and so Labour had to go to the IMF and ask for the money to keep the country afloat. As a result, the Labour Government was required to bring in monetarism by the IMF - when they bail you out you lose control of fiscal and monetary policy as a condition of the bail out.

Trouble is, this time the IMF is out of cash. So who bails out the UK this time? My guess is UK pension schemes. They are the only ones with any cash left. I can see an argument being made that goes along the lines of, "shares are clearly too risky for hard-working families' hard-worked life savings to go into so we have made the tough choice to decrease the level of risk pension funds are allowed to take to protect the savings of hard working families in these difficult times started by the problems in the US. Thus we require that xx% of funds are invested in the safe haven of Gilts which due to the prudence.....". You get the picture.

StevieJ

Just out of interest Gen are you spreading despair and despondency in OZ ?

StevieJ

dopester wrote: »

Oh no they won't. The market can withhold a trillion pounds faster than the BoE can get it printed.

I honestly don't know why you're so eager to see the high/hyper-inflation path !!!!!!. It is clear from previous posts you are on standby to buy a house, and leverage in to BTL.. for the "coming inflation" to see you whisked away to riches.

Were it to happen like that, I don't think multiple houses will save you, and doubt you or government would be able to enforce property rights or protect freedoms or laws generally. Someone or some group wants what you and your family has, they can take it by brute force - mouth on kerb-stone and stomp job.

And basic functions like food supplies and all you take for granted would be very challenged. Plus the external dark threats - which never went away despite us being "modern" now - a country in such disarray would be more open to.

Hey Dopester you two are on the same side-ish

!!!!!! did you get this from :eek: mouth on kerb-stone and stomp job. That is horrible, is it out of some killer thriller :cool:

Count_Dante

StevieJ wrote: »

Hey Dopester you two are on the same side-ish

!!!!!! did you get this from :eek: mouth on kerb-stone and stomp job. That is horrible, is it out of some killer thriller :cool:

American History X, I believe.