BoE Decision to buy Government Bonds

MK62

RG2015 said:

The Bank of England is buying up Government Bonds in an attempt to calm markets. However in trying to make some sense of it I came across the following on the BBC website.

But it was not a decision made by the Bank's Monetary Policy Committee, who were informed of the decision after it was made by the Bank's financial experts.

It comes at exactly the same time as that committee had been committed to do the exact reverse policy - selling government debt. That process was due to start next week and has now been delayed.

I am now struggling even more to understand who is doing what.

Without making it political, can anyone provide a simple explanation of who is responsible for what between the Treasury, the BoE Monetary Committee and the BoE Financial Experts?

This link describes the FPC ..... https://www.bankofengland.co.uk/financial-stability

This link covers what the MPC do..... https://www.bankofengland.co.uk/monetary-policy

Personally I'm not overly convinced that the FPC's secondary remit, to support government economic policy, is entirely compatible with BoE independence, but I suppose it depends how this works in practice (and it is a secondary remit, not a primary).

The Treasury is basically there to implement government economic policy......from gov.uk   "HM Treasury is the government’s economic and finance ministry, maintaining control over public spending, setting the direction of the UK’s economic policy and working to achieve strong and sustainable economic growth" Mr Kwarteng is basically the boss.

As to who is doing what at the moment......well to me it seems Mr Kwarteng has embarked on his tax cutting experiment without due consideration to what the BoE is doing at this time.....and created a policy pulling in the opposite direction......and, well here we are, in a right old mess, to coin a phrase.......and Mr Kwarteng's response to it all?...."No comment"......you couldn't make it up tbh....Liz Truss, gone AWOL........instead they shove Andrew Griffith in front of the cameras, to laughably claim it's not down to the mini-budget, as other countries have similar "headwinds".....really? One can only admire his ability to keep a straight face......

Linton

masonic said:

This was emergency action by the BoE to stop long-dated bond yields rising to the point pension funds (which often hedge their liabilities using derivatives) from facing margin calls they couldn't satisfy. A number of pension funds would have become insolvent today if this emergency action wasn't taken.

If you remember back to the global financial crisis, similar swift and decisive action was taken to protect our financial system. Parallels can be drawn from that, although the cause this time is very different.

Thanks for this. One question though, why were pension funds using derivatives? I had understood that actuaries determine liabilities well in advance and the pension companies buy gilts when issued to hold to maturity so that the income matches those liabilities.  So they should not be affected by short term movements in the bond markets.

george4064

Linton said:

masonic said:

This was emergency action by the BoE to stop long-dated bond yields rising to the point pension funds (which often hedge their liabilities using derivatives) from facing margin calls they couldn't satisfy. A number of pension funds would have become insolvent today if this emergency action wasn't taken.

If you remember back to the global financial crisis, similar swift and decisive action was taken to protect our financial system. Parallels can be drawn from that, although the cause this time is very different.

Thanks for this. One question though, why were pension funds using derivatives? I had understood that actuaries determine liabilities well in advance and the pension companies buy gilts when issued to hold to maturity so that the income matches those liabilities.  So they should not be affected by short term movements in the bond markets.

Derivatives are utilised within LDI investments, read more about it in the below link:

https://principlesandinterest.wordpress.com/2022/09/28/liability-driven-investment-ldi-quick-explainer/

Frequentlyhere

In terms of implications of all of this thus far, my understanding is that with QE in place, the pressure will now revert to weakening of the £ in absence of any interest rate rises and in the (thus far) continued presence of these ill-advised tax cuts.

QE can do that anyway, but at a time of high inflation and when other countries are doing QT that seems inevitable.

Is the above right? If so, I think November is a long time away to start with the large interest rate increases the bank is planning. I'd put my money on an emergency interest rate hike or at least perhaps a semi-emergency 'move to October' meeting in the near future, depending how it goes.

MK62

There's a good summary article here on this subject....    https://www.portfolio-institutional.co.uk/features/liability-driven-investment-testing-times/

Millyonare

Linton said:

masonic said:

This was emergency action by the BoE to stop long-dated bond yields rising to the point pension funds (which often hedge their liabilities using derivatives) from facing margin calls they couldn't satisfy. A number of pension funds would have become insolvent today if this emergency action wasn't taken.

If you remember back to the global financial crisis, similar swift and decisive action was taken to protect our financial system. Parallels can be drawn from that, although the cause this time is very different.

Thanks for this. One question though, why were pension funds using derivatives? I had understood that actuaries determine liabilities well in advance and the pension companies buy gilts when issued to hold to maturity so that the income matches those liabilities.  So they should not be affected by short term movements in the bond markets.

See previous post.

UK pension funds have been using high leverage to turbocharge their gilt returns. The pension funds are gambling your granny's life savings by casino banking with a multiplier of debt.

We are back in 2008.
Only, this time, it is the pension funds (not the banks).

RG2015

@MK62,

Many thanks for your links giving information on the FPC. I will read this and also the other offerings here. Sadly I doubt I will ever understand how macroeconomic can be modelled and managed.

I was far more comfortable with microeconomics than macroeconomics when I last studied some economics in the 70s.

I do remember though studying work done by Cyert & March on the behavioural theory of the firm.
This in particular challenged the traditional profit maximisation model arguing that you needed to consider the effect of every individual’s personal action and reaction. And as is obvious people are all different.

By analogy on a macro scale, it does appear that none of this has been considered here, or if it was, it was ignored.

sevenhills

MK62 said

Personally I'm not overly convinced that the FPC's secondary remit, to support government economic policy, is entirely compatible with BoE independence, but I suppose it depends how this works in practice (and it is a secondary remit, not a primary).

The Treasury is basically there to implement government economic policy......from gov.uk   "HM Treasury is the government’s economic and finance ministry, maintaining control over public spending, setting the direction of the UK’s economic policy and working to achieve strong and sustainable economic growth" Mr Kwarteng is basically the boss.

Do other countries central banks have the same rules and work in the same way? The BoE have received some criticism.

Type_45

Two weeks to flatten the yield curve.  Just £65bn and then we're done.  Problem solved.

aroominyork

Once (if...) things are stable, how long will it take to drip feed the long-dated gilts back into the market?