Economy snippets

Mr_Mumble

HAMISH_MCTAVISH wrote: »

The demand for gilts was far more than 25 billion a year prior to QE.

But demand is dependent on the price/yield of the gilt, Monument Securities are not saying the British government can not sell gilts next year, just the cost of selling those gilts is going to be higher as the Bank of England will have stopped its purchases.

The fact that the BoE has decided to buy back gilts

Semantic technicality: the BoE isn't buying back gilts since it didn't issue them in the first place!

being held by financial institutions to increase liquidity in the system has no bearing on the overall demand for gilts

Of course it does! While the purchases by the BoE doesn't change the gilt supply it does change the gilt demand, it shifts the demand curve outward/to the right. The BoE are demanding gilts, they are buying them through a competitive reverse auction so the sellers (the pension funds, banks and other financial institutions) think they're getting a good bargain. Withdraw the BoE purchases and demand will fall for gilts at present yields, the yield will rise and then the DMO will have to issue new debt with a higher coupon.

they join the private-sector in bidding, UNLESS, the natural demand for gilts has somehow dried up during the recession and the purchase programme is effectively replacing demand, which is little short of monetising debt.

Its not a matter of replacing demand, its additional demand that pushes up the price of gilts and lowers the yield that is paid. New Gilt issues from the DMO are invariably priced within fractions of the market price and so debt issued this year by the DMO has been cheaper thanks to BoE purchases.

I don't think I'm communicating clearly today, so I'll try a simple example (that may not help!!!!).....

Guess what... My head is now buzzing, I'll respond to this tomorrow.

treliac

lostinrates wrote: »

I wonder why the Welsh are more pessimistic than the rest of the country?

carolt wrote: »

Maybe heavyish reliance on public sector?

Or sheep...

Mr_Mumble

HAMISH_MCTAVISH wrote: »

No.... The BoE did not buy any of those new gilts directly!!!!!

It bought old gilts sitting as assets with financial institutions, with the stated aim of increasing liquidity.

Okay, my last post tonight (honest!) just a clarification. The BoE have been buying up recently issued gilts. Here is a list of the Gilts the BoE have bought:

UKT_5_070914
UKT_4.75_070915
UKT_8_071215
UKT_4_070916
UKT_8.75_250817
UKT_5_070318
UKT_4.5_070319
UKT_4.75_070320
UKT_8_070621
UKT_4.25_071227
UKT_6_071228
UKT_4.75_071230
UKT_4.25_070632
UKT_5_070325
UKT_4_070322
UKT_3.75_070919
UKT_4.5_070313
UKT_8_270913
UKT_2.25_070314
UKT_4.5_070934
UKT_4.25_070336
UKT_4.75_071238
UKT_4.25_070939
UKT_4.5_071242
UKT_4.25_071246
UKT_4.25_071249
UKT_4.25_071255
UKT_2.75_220115
UKT_4_220160

Key: UKTreasury_coupon_ddmmyy of maturity

Check this with the DMO's press releases for recent gilt auctions. Three examples:

UK Debt Management Office auctioning 4% Treasury Gilt 2022, maturity 07/03/22:
http://www.dmo.gov.uk/documentview.aspx?docName=/gilts/press/pr171109.pdf
http://www.dmo.gov.uk/documentview.aspx?docName=/gilts/press/pr220909a.pdf
http://www.dmo.gov.uk/documentview.aspx?docName=/gilts/press/pr160609.pdf
http://www.dmo.gov.uk/documentview.aspx?docName=/gilts/press/pr210409a.pdf
Bank of England buying UKT_4_070322

UK Debt Management Office auctioning 4 1/4% Treasury Gilt 2039, maturity 07/09/39:
http://www.dmo.gov.uk/documentview.aspx?docName=/gilts/press/pr230609b.pdf
Bank of England buying UKT_4.25_070939

UK Debt Management Office syndicating 4% Treasury Gilt 2060, maturity 22/01/60:
http://www.bankofengland.co.uk/publications/quarterlybulletin/qb090201.pdf
Bank of England buying UKT_4_220160

(hopefully those BoE links will work, if they've got cookies in 'em you'll have to look at them manually via http://www.bankofengland.co.uk/markets/apf/gilts/results.htm )

The requirement for the BoE purchasing gilts is for a maturity range between 5 and 25 years:

Gilt purchases. Conventional gilts in the maturity range of
5 to 25 years are purchased through twice-weekly reverse
auctions. The Bank will accept the cheapest bids (relative to
market prices) for the gilts offered to it up to the total amount
to be purchased at that auction. Although the bidders in these
auctions are banks and securities dealers, they can submit bids
on behalf of their customers. And the auctions also allow
non-competitive bids to be made by other financial
companies, whereby they agree to sell their gilts at the
average successful price in the competitive auction.

Nowt to do when they're issued (which I'll say for the 70870573th time: doesn't matter )