Gilt auction failure.

carolt

"Bond prices plunged this morning and look to be on course to record their biggest weekly loss in at least six years. As a result of falling prices, yields (income relative to price) shot higher.

"I just think there's a state of confusion in the market at the moment. It requires greater clarity from the Bank on what its aims are in this process," said Sean Maloney, strategist at Nomura International.

More than half the big fall in gilt yields since the Bank announced its QE programme has now been reversed. A key aim of QE was to push down yields, thus reducing further borrowing costs in the economy."


http://www.guardian.co.uk/business/2009/mar/25/uk-economic-rescue-in-crisis


Shame. And I thought it was such a good idea.

carolt

Or, even better, here:

http://www.guardian.co.uk/global/dan-roberts-on-business-blog/2009/mar/25/economy

Mervyn was right, we're broke


As governor of the Bank of England, Mervyn King has access to a lot of insider information, but I wonder if even he could have known quite how prescient his warning about public finances yesterday would turn out to be.

Within hours of him telling Brown not to blow the budget, the gilts market has produced a ringing endorsement. An alarming report from the Debt Management Office shows that investors are already shunning government gilt auctions - in effect questioning the creditworthiness of the nation.

There have been failed debt auctions before and the Germans struggled relatively recently, but they are pretty rare. Given that the Bank of England is meant to be supporting the gilts market by pumping in money through quantitative easing, this is doubly alarming. The sharp fall in wider bond prices caused by this auction news is exactly the reverse of what this policy was intended to achieve.

Critics of Mervyn will no doubt point out that his recent caution may have caused the auction to fail, by giving investors the impression that he was going cold on the idea of quantitative easing. I think on this occasion, it is more likely the weakness in the gilts market is a symptom of what he was talking about, not an effect. We really are dangerously close to the edge.

Alan_M_2

Generali wrote: »

The Government sells Gilts paying a certain rate of interest and asks people to bid for them. The bond purchased will pay a coupon payment (interest) and when it matures will pay £100.

Interested parties bid for the bonds so if the Govt tries to sell 1 year bonds paying 10%, buyers might bid £105 at present because that's the value they give to the £10 interest plus the £100 face value of the bond they're going to get back.

Gilts can be traded freely - most High Street banks will trade them on your behalf and there are tons of brokers who will trade hem for you too. Personally, I think they're a very good investment.

This is one of the reasons I read MSE.

I come on here and someone (usually Generali) explains these things in laymans terms. Now I'm in business and (I like to think!) reasonably intelligent, but I realise how little I know about what really happens in all these "markets" and finance worlds........

And there is one of the problems that is glossed over but I feel quite responsible for some of this mess.

With modern political correctness and an obsession with being transparent there is too much information being released to the general populous that really are not equipped with the knowledge with which to process this information (and I include myself in that populous).

I simply dont understand or need to understand large amounts of the financial jargon reported in the papers/TV/internet. There's nothing I could do about it if I did understand it. It then, in reality, becomes nothing more than misunderstood scaremongery and can lead to mass panic and runs on banks completely uneccesarily in worst case.

I sat here at work the other day and considered that if I had a crystal ball and could have predicted the current state of affairs what exactly could I have done with my business to have made thinks easier.....the answer is nothing....short of selling all my stock and closing there's absolutely nothing I could have done.

I have never felt so out of control of my own business ever, it's a very strange feeling.

Mainly becasue I've been hit on two fronts, as an importer that buys in Euros and Dollars, it's hard enough to cope with a huge currency flucuation against you, it's also hard to cope with a recession, trying to deal with both at once is proving to be exceptionally difficult.

It's sad, that the only reason I'm still in business is so many competitors have gone to the wall I'm picking up enough business to cover tthe loss of my own customers going to the wall......however, the pool is getting smaller and smaller all the time, we have no idea what's happening and when it's happening.

Its at times like this my bank asks for a 12/24 month trading forecast with specifics on what it's based.....hold on, I'll check with Jonathin Cainer on his Horoscope site.......

epz_2

Generali wrote: »

Short dated Gilts are low risk as are index linked Gilts when held to maturity.

Certainly it's hard for me to pick lower risk investments except perhaps farmland with an independent water supply. Then we're into tin hat territory.

you forgot to metion the defensable position and anti zombie attack measures lol

michaels

I would have thought the unexpected inflation numbers are what has driven the medium guilt yields back up.

I am quite taken with Generali's theory on the long guilts. The only reason for buying these given the potential for capital loss would be if they matched your liabilities - which pretty much means annuities. However given the 10 year window to purchase an annuity I don't suppose anyone is buying right now...

amcluesent

The failure of gilt sale will have only one consequence. Clown will legislate for the compulsory conversion of private savings above say £6000 into perpetuals with a 0.25% yield, a.k.a "The people's loan."

ricll

purch wrote: »

If an investor, buys and holds to maturity theie Investment is unaffected by market movements, and they will receive at maturity the nominal value of their Gilt in addition to the coupons they received over time.

but what about the inflation risk? surely that would affect the investment? if you don't have gilts linked to the inflation that is.

btw what sort of interest rate can you get with this kind of investment at the moment?

Mr_Mumble

ricll wrote:

btw what sort of interest rate can you get with this kind of investment at the moment?

Depends on redemption date. 0.5% for gilts maturing in the next year to 4.5% for gilts with a redemption date 40 years from now. These rates may seem low but gilt-edged securities are supposed to be the least risky of all assets.

Prices can be checked at:
http://www.dmo.gov.uk/index.aspx?page=Gilts/Daily_Prices
and:
http://www.ft.com/gilts

You're right about the potential inflation risk. Because of the general trend for lower inflation since the 1970s government securities have been a good investment over this period. This period may be coming to an end with worries about printing money and general fiscal irresponsibility. Warren Buffett in the 2008 Berkshire Hathaway report (p.18) had this to say:

When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

chookie1

amcluesent wrote: »

The failure of gilt sale will have only one consequence. Clown will legislate for the compulsory conversion of private savings above say £6000 into perpetuals with a 0.25% yield, a.k.a "The people's loan."

don't give him ideas

purch

btw what sort of interest rate can you get with this kind of investment at the moment?

The auction in question had a coupon of 4 1/4 %