Is it time to ditch our obsession with austerity and deficit?

purch

cells wrote: »

Issuance rate is irrelevant as it doesn't take into account the price sold

for example if I issue a ten year bond with a face value of £100 and an annual interest of 10%....and I sell you this bond for £150 you are indeed getting 10% interest on the £100 bond but a hell of a lot less on the £150 you used to buy it

When the DMO auctions new issues, the price paid is determined by the competitive and non competitive bids made.

When I said that the average issuance rate for Gilts last year was 2 1/2 %, that referred to the price they were issued at, not the coupon, although the average of the coupon wasn't much higher.

The bid cover ratio's were not particularly high, and havn't been for quite some time.

As an example 10 year paper with a 2 3/4 % Coupon had a highest accepted bid of 101.661, which equates to 2.561% as a yield.

http://www.dmo.gov.uk/reportView.aspx?rptCode=D2.1A&rptName=d291e2e6-e0d7-4483-a774-a7691d09e740||GILT%20MARKET%20%289%29&reportpage=Auction_Results

antrobus

purch wrote: »

When the DMO auctions new issues, the price paid is determined by the competitive and non competitive bids made.....

The DMO is very transparent. You can look up the calendar and see every gilt issue that has been made recently.

The last one was a 2% Treasury Gilt 2020, £4.1 face value raised £4.2 million. I can't really be bothered to work it out, but I expect the yield isn't far off the 1.47% that Bloomberg is quoting for 5 year gilts.

Of course, if you thought that CPI was going to average 1.5% over those five years, you could say that the real yield was zero.:)

purch

The average accepted price for that issue was 102.485, which means the UK Government borrowed that money at 1 1/2 % exactly.

Clean closing price was 102.77 yesterday so anyone who bought would have a tiny profit, but that makes no difference to the the rate the Governement is paying.

antrobus

purch wrote: »

The average accepted price for that issue was 102.485, which means the UK Government borrowed that money at 1 1/2 % exactly.

Clean closing price was 102.77 yesterday so anyone who bought would have a tiny profit, but that makes no difference to the the rate the Governement is paying.

Thanks for that.

Just goes to show that governments do indeed issue debt at yields that are pretty close to those prevailing in the market. So if you want to know what the government has to pay to borrow money, just look up the prices on Bloomberg.:)

antrobus

Curiously enough, the European Commission has recently issued its judgement on the UK's "obsession with austerity and deficit".

It has placed the UK on the naughty step for not having enough austerity. Having noted that we had an excessive deficit of 10.9% of GDP in 2009-10, they are most put out by the fact that we have failed to take sufficient action to sort it out and are still running a deficit of 5.2%.

Perhaps we should be thankful that we did not sign up for the Euro, otherwise we might have found it difficult to take no notice of such things.:)

http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/126-08_commission/2015-05-13_uk_126-8_commission_en.pdf

Generali

FWIW, Portugal has just managed to sell 6 month Government bonds at an annual interest rate of -0.002%.

That is you lend Portugal EUR100 and after 6 months get EUR99.999 back (feel free to check my sums).

http://www.bloomberg.com/news/articles/2015-05-20/portugal-sells-six-month-bills-at-negative-yield-for-first-time

There is just a little part of me that thinks this can't end well.

danothy

Generali wrote: »

FWIW, Portugal has just managed to sell 6 month Government bonds at an annual interest rate of -0.002%.

What's the motivation for putting your money into something like this? Is it really the case that everything else is expected to lose more? Even cash? Is it basically the Greeks who are fearing a depositor haircut that see this as more reliable than holding cash?

Generali

danothy wrote: »

What's the motivation for putting your money into something like this? Is it really the case that everything else is expected to lose more? Even cash? Is it basically the Greeks who are fearing a depositor haircut that see this as more reliable than holding cash?

It'll be a combination of things.

- Forced buyers (probably - lots of bond markets have forced buyers in them)
- QE (ECB sets a floor price in effect)
- Hoping to find a bigger fool (in six months!)
- Fear of losing more money in something else.
- Some other stuff I've not thought of

I know a lot of Fixed Income fund managers are now adopting a 'beta' strategy, that is buying up bonds that they think will go up in price later.

purch

It is only a 6 month Treasury Bill.....................but still.

Absolutely bonkers :eek:

danothy

Generali wrote: »

It'll be a combination of things.

- Forced buyers (probably - lots of bond markets have forced buyers in them)
- QE (ECB sets a floor price in effect)
- Hoping to find a bigger fool (in six months!)
- Fear of losing more money in something else.
- Some other stuff I've not thought of

I know a lot of Fixed Income fund managers are now adopting a 'beta' strategy, that is buying up bonds that they think will go up in price later.

Okay, so if you're contractually obliged to buy you're screwed into it, fair enough, and the ECB can basically make this concession as it's printing the money to buy them anyway, also fair enough.

But as for the bigger fool, don't they mature in six months? Don't you have to find the fool before that time is up? And what on earth could make something like this go up in value at all, let alone with such an obvious looming horizon?