There’s plenty of discussion about why the oil price collapsed (read Izzy’s take on the changed structure of the market, for one), but consider a broader question: if markets can be so wrong about the price of one of the most widely used and heavily traded commodities, what else are they missing?
We ask because a halving in the price of other markets may not be cheered in the same way as cheap oil. We also wonder what it says about how orderly (or otherwise) big market declines will be, when they eventually roll around. After all, major currency pairs don’t move by a fifth in one morning…
To that end, here’s a reminder of what a 50 per cent decline looks like for a selection of markets, and the last time that level was hit. Read more
The British government isn’t renowned for its wonderful financial decisions. But among the best must be the consolidations of perpetual bonds between the two world wars. (Other candidates include the purchase of the Ottoman share of the Suez Canal for £4m in 1875 and the £35,000 paid for the Elgin Marbles in 1816.)
But you’d never guess this from reading Friday’s press release from Chancellor George Osborne when he announced that one of the smaller perpetual bonds would be repaid. Here’s what Mr Osborne said: Read more
From ICAP’s Gilt Repo Comment on Monday:
The announcement by the DMO of further supply of UKT4T 15 (1.75 bln on the 29th May) is welcomed in light of the issue’s “tightness” in the REPO market. The bond overnight has averaged 11 bps through DBV to date in May and was tight in the 1st quarter. However, post Friday’s announcement the bond held its premium in term and it is not certain the additional supply will cheapen the issue despite the free float increasing.
An interesting nugget from Nomura’s Geoffrey Kendrick on the Swiss National Bank data released earlier, as it pertains specifically to sterling:
On GBP specifically we estimate that SNB buying accounted for two-thirds of all non-resident buying of gilts in Q3.
Credit Suisse’s answer last week to the (rather odd) idea of the British government “cancelling” (restructuring) the gilts held by its central bank under quantitative easing…
From the bank’s credit analyst William Porter, it’s worth a read:
Any financial problem can be solved at a stroke if double-entry book-keeping can be ignored as a constraint. The problem is, it cannot. So debate in the private-sector financial community about “solutions” to the UK’s financial challenges based on ignoring it worry us. In the UK, Mervyn King has been quick to debunk the fallacies. But if they can exist even for a while in the very simple UK, then the infinitely more complex euro area (which we do not address in detail here) is fertile ground for solutions based on fallacious reasoning…
The Office for National Statistics is out to get the Retail Price Index… or at least the part of responsible for the ‘formula effect gap’. But before we get to the sexy stuff — involving gilts and clauses and all — a quick statistical primer is called for.
The RPI began life as a compensation index, developed as an aid to protect ordinary British workers from price increases associated with WWI. It didn’t become the main domestic measure of inflation until much later. Read more
FT Alphaville has already referred to the weird phenomenon of unsecured funds trading through secured funds in the UK this week, as reported by ICAP.
By definition, secured borrowing should be cheaper than than unsecured. Read more
A little update on what short-term rates are pricing in when it comes to BoE meetings this fall courtesy of ICAP’s Nick Middleton.
As he observes, something of a 25 bps cut definitely being eyed to some degree: Read more
The UK’s Office for Budget Responsibility is in desperate need of a graphic designer…
Low yields in the context of epic supply may baffle some people, but not UBS’s Chris Lupoli.
Lupoli, part of Global Macro Team, seems, if anything, to subscribe to our negative carry shift theory — the idea that a more permanent curve transformation may be under way. Read more
We promised you the second part of Hinde Capital’s “Britain is doomed” analysis…
… so here are some choice extracts from the report (which is now up in its entirety on their website): Read more
From the UK Debt Management Office’s issuance plans for the 2012-13 fiscal year, released as part of the UK Budget documents…
In light of evidence of strong demand for gilts of long maturities and against the backdrop of historically low long-term interest rates, in 2012–13 the DMO will consult on the case for issuance of gilts with maturities significantly longer than those currently in issue, that is in excess of 50 years, and/or perpetual gilts. The consultation will build an evidence base to inform the Government’s decision on whether to issue such instruments. It will seek to establish the likely strength and sustainability of demand, the cost-effectiveness and risks of issuance, and the impact on market liquidity and the good functioning of the wider gilt market.
Time like an ever-rolling stream
Bears all its bonds away Read more
We couldn’t not post the thoughts of Julian Wiseman, Societe Generale rate strategist, concerning HM Treasury’s trial balloon of a possible 100-year UK government bond.
Wiseman did after all think of it first. Read more
Or, taking consols, the War Loan, and all that UK sovereign debt jazz into the 21st century.
The latest from the Chancellor of the Exchequer ahead of the UK’s March 21 Budget, according to Wednesday’s FT (and leaving SocGen’s Julian Wiseman prescient): Read more
Linda Yueh of Bloomberg TV just asked a very sharp question of Bank of England governor Mervyn King at Wednesday’s Inflation Report press conference, at pixel time. If the UK’s money supply is contracting, shouldn’t there be more QE, and are you buying the right assets (gilts) anyway?
Mervyn dodged the last part. (Update — see below) Read more
This’ll be a controversial argument about the Bank of England’s buying of UK government debt, we know… but it comes from Philip Rush of Nomura:
Aggressive quantitative easing brings [gilt] market capacity constraints into play. A renewed intensification of the sovereign debt crisis could cause this should one of QE’s reverse auctions fail. Tweaking maturity buckets or adding linkers could cure the constraints…
We’ve already brought you one collateral crunchy statistic from the Bank of England’s latest monetary and finanical statistics. But here’s another interesting trend from the Bank’s gilt repo and stock lending numbers.
We should note that we have no idea how meaningful this is, but the trend is interesting nonetheless. Read more
From the minutes of the UK’s Debt Management Office consultation with Gilt-edged Market makers and investors held on January 12:
There were also a number of calls for clarification around the prospects for the redemption of 3½% War Loan, although mixed views were expressed on whether there was a case for calling it. It was noted that any such decision would be taken in the context of the Government’s debt management objective and that if any decision was made to redeem 3½% War Loan, that decision would be announced via the usual channels to all market participants at the same time.
International investors bought £28.87bn of gilts in October and November – the biggest amount over a two-month period since the data were first collected by the Bank in 1982, the FT reports, helping the government’s long-term benchmark borrowing costs have fallen to lows last seen in the 1890s. Ten-year yields fell to 1.96 per cent last week. They closed at 2.05 per cent on Wednesday. Demand has been supported by the Bank’s decision in October to pump £75bn into the economy – through gilt purchases – in its second QE programme.
(Alternative title: Financial repression meets the History Channel?)
Telling the UK government to issue 100-year bonds clearly wasn’t out-of-the-box enough for Societe Generale’s rates strategist Julian Wiseman. Read more
State Street, the large US custodian bank, has cited new regulations including the “Volcker rule” for its decision to quit the UK and German government bond markets just three months after becoming an official dealer, says the FT. The Volcker rule bans US banks from proprietary trading – buying and selling for their own account. It contains an exemption for US Treasury securities but not foreign sovereign debt. Although market-making – buying and selling on behalf of clients – is permitted under the rule, bankers say worries that that activity will be deemed “prop” will hamper liquidity. State Street’s withdrawal is one of the first concrete signs that banks are preparing to walk away from European market-making businesses because of the new regulatory environment.
After a splurge in September, overseas investors scooped up a more gilts in October, according to figures released by the Bank of England on Tuesday.
At first sight, this looks mad. Lending to the UK government, in charge of the clapped-out British economy, now returns less than lending to Europe’s most successful country. Worse still, the yields on gilts are measured in sterling, a chronically weak currency, so not only does your money earn less, you’ll be repaid in something which history says will have been devalued by the time you get it back. Oh, and by the way, inflation is 3 per cent above the yield, making the internal devaluation painful, too.
Something is seriously awry here, and two events this week offer clues to why German government 10-year paper yields more than the equivalent UK stock. On Wednesday the markets were spooked by the failure of an auction of 10-year German debt. Those in this arcane world struggled to understand what it meant, so there’s little hope for the rest of us. It’s either bad news, or very bad news, probably depending on whether you’re short of German bonds. Read more
As a concept, the UK as a haven takes some getting your head around.
Fortunately, Andrew Roberts, head of European rates strategy at RBS, is on hand to help understand why the UK and in particular its gilt market, where yields are close to historic lows (see below), really is a good place to warehouse cash. Read more
Has the bond market got it right when it comes to the UK?
On Tuesday, Lex investigated why the UK can raise debt at substantially cheaper levels than its eurozone counterparts, in particular France. Read more
At some point on Wednesday, eurozone governments will say they want banks to find an unspecified amount capital, based on revised sovereign haircuts which… we still don’t know a lot about.
We know that sovereign bond positions will be marked down, or up, according to market values. (When the values will be taken, we don’t know either. Imagine marking five-year Italian debt at dates before and after this summer’s ECB intervention, for example.) We know at the very least that this all fits into a 9 per cent core tier one capital ratio target. Read more
No wonder the National Association of Pension Funds has been wailing about the Bank of England’s plan for another round of QE.
September’s update from the UK’s Pension Protection Fund makes for grim reading. Read more