Hedging UK Government Risk

michaels

https://forums.moneysavingexpert.com/discussion/comment/82149616#Comment_82149616

But we have a twin deficit so even if the boe purchased as many govt bonds as needed we still need foreigners to fund the current account deficit - all those nice to haves like food, medicine and fuel…

StewedApple

Been reading Michael Palin's diaries recently, now got to the period of the 3-day week, power cuts, and food shortages (Ted Heath and Anthony Barber were not popular) - not least because they introduced VAT and set in train events that would lead to the Sterling Crisis referred to above.

Much better to plan for the practical than to scare yourself with economic bogeymen.

michaels

Seems like I could hedge the risk of a severe, say 30%, DB and DB haircut using short futures or options on gilts but it would cost about 7% of annual income.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82149651#Comment_82149651

Most gilts are bought by us to cover DB pensions, annuities, insurance liabilities etc, by UK and foreign banks and major companies as a store of cash reserves. and increasingly directly by the British public.

There is a massive amount of money simply recirculating.

flaneurs_lobster

https://forums.moneysavingexpert.com/discussion/comment/82149614#Comment_82149614

The machete can double-up.

Aylesbury_Duck

https://forums.moneysavingexpert.com/discussion/comment/82149548#Comment_82149548

What's a fine toothcomb? I think the phrase is fine-toothed comb. 🙂

Veloflyer

I too increasingly fret about HMG not paying out on Gilts at maturity else the £ being worthless. My fear (rightly or wrongly) is we are entering uncharted waters a little and the UK is a time bomb of credit-fuelled explosive which could detonate if not now, then within the next few years. I appreciate there may be no sound financial basis for thinking in such a way and such fears may well be baseless, but perception is a major factor. If bond markets/investors etc. also perceive the UK is a busted flush, then who knows what may happen.

Assets, gold, property perhaps?

Linton

https://forums.moneysavingexpert.com/discussion/comment/82149796#Comment_82149796

HMG will never be unable to pay out on a gilt since since the payment is in £ s which are created by the BoE. Were it to do so it would have great difficulty selling any in the future. The risk is inflation not bankruptcy. But inflation can be managed, and you can hold inflation linked gilts.

The UK is still one of the world's major economies. Many other countries are in a worse or similar economic situation.

The risk to gilts would arise if the UK ceased to exist as a sovereign nation state. But under those circumstances your savings could be the least of your problems. If the state collapsed or was overthrown would your assets be safe? To whom could you sell your property and how would they pay you ?

One useful option you do have is to hold diversified investments from across the world such as global share funds.

StewedApple

This one's up there with the hysteria about Ponzi schemes - a Ponzi scheme by definition can never repay its creditors because it could never generate the income needed to sustain itself. UK gilts by definition simply don't behave this way.

If you think an asset has a risk-level you don't like then sell it and adjust your portfolio. Problem solved.

leosayer

Anyone who compares government debt to that of households or businesses either doesn't know what they're talking about, is dumbing stuff down or is playing politics.

No business or household is able to control the money supply or set interest rates. Only the BoE can do this via Monetary Policy.