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Increased tax, higher unemployment & economic difficulties

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GoSeigen
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Re: Increased tax, higher unemployment & economic difficulties

#360384

Postby GoSeigen » November 26th, 2020, 5:27 pm

NeilW wrote:
dealtn wrote:
Absolutely not true unless we have a completely new framework where Gilt Coupons (indeed yields) aren't determined by market rates. I'll be amazed if that happens. Policy rate could be zero (or indeed lower) and Gilt yields and Coupons much higher than presently!


It is true. QE demonstrated that to the tune of £800bn so far, and the BoE could easily set a standing price where they will be any or all of the Gilts/Bills in issue.

They have full control of the yield curve.


Utter utter nonsense. When I put my child on my lap and they steer the car it may look like they have full control of the vehicle but I promise you they do not! The bond vigilantes are giving the BoE a driving lesson -- when it's time to go home they will turn the juggernaut right round.

GS

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Re: Increased tax, higher unemployment & economic difficulties

#360388

Postby Lootman » November 26th, 2020, 5:30 pm

NeilW wrote:
Lootman wrote:So what could ruin this is if the global investment community decides that sterling is a basket case currency.

To do that somebody has to be coming in the opposite direction - since an exchange is required. Who is that, and what do they know?

Largely it will be nations that need to export to the UK to maintain demand for their planned output.

The 'global investment community' doesn't exist. There are differences of opinions - otherwise there wouldn't be a market

Two different things. The market for gilts is 100% investors. They can be fickle and dump their gilts if the prospects for UK interest rates or sterling looks bad.

Then there is the market to buy sterling (with another currency). Some of that will be foreign businesses seeking to export to the UK, as you suggest. But currencies are also treated as an investment asset class, so sterling can suffer if sentiment about UK Inc. changes.

In fact of the major world currencies, sterling has been one of the more volatile ones, typically doing well in good market conditions and doing badly in bad market conditions. It is down some 40% versus the dollar in the last 13 years, for example - not good for US holders of UK gilts, who luckily have seen capital values go up with declining rates, as event unlikely to recur given current near-zero rates.

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Re: Increased tax, higher unemployment & economic difficulties

#360400

Postby dealtn » November 26th, 2020, 5:56 pm

ursaminortaur wrote:
dealtn wrote:
NeilW wrote:
It is true. QE demonstrated that to the tune of £800bn so far, and the BoE could easily set a standing price where they will be any or all of the Gilts/Bills in issue.

They have full control of the yield curve.


Full control must mean something different to you then!

Why aren't the issuing with zero coupons then, and saving even more interest expenditure? Market yields are what determines things. Admittedly the agency of the BoE is a large part of the market demand at present, but even then they haven't got zero yields, and certainly can't be guaranteed to even be any part of the demand in the future, let alone the major determinant of price/yield.

Unless you are expecting a change in regime, in which case explain the when and how, you will continue to have gilt yields determined by the market.


The UK has been issuing gilts with negative yields (rather than just the real yield being negative) since May 2020.

https://www.cnbc.com/2020/05/20/the-uk-just-sold-its-first-ever-negative-yielding-government-bond.html

In an auction Wednesday, the country’s Debt Management Office said it sold £3.8 billion ($4.66 billion) worth of three-year gilts at a yield of negative 0.003%.

This negative-yielding bond means the British government is effectively being paid to borrow. Investors will get back slightly less than they initially paid if they hold the bond to maturity, such is the demand for shoring up money in bonds.



https://www.lse.co.uk/news/update-1-more-than-half-of-british-gilt-market-in-negative-yield-territory-tradeweb-zfwkzdajk4g1e8k.html

According to Tradeweb, more than half of the British government bonds traded on its platform now carry negative yields.

Its data showed that the pile of negative-yielding gilts rose to around 1.33 trillion pounds ($1.74 trillion) as of
end-July or just over 53% of a total market worth almost 2.5 trillion pounds. This was up from 1.17 trillion pounds as of end-June.

The British gilt curve out to eight years has yields in negative territory. On Friday, British 10-year government bond yields sank to their lowest on record at just 0.07%.


https://monevator.com/negative-yields-bonds/

The UK’s maiden negative conventional government bond goes by the name of 0¾% Treasury Gilt 2023 and £3.8 billion worth of the blighter was auctioned off on 20 May 2020.

0¾% Treasury is a 3-year gilt that pays an annual interest rate (also known as the coupon rate) of 0.75% on its face value3 of £100.

In an ordinary world that means you get:

75p of income every year you hold the £100 bond.

£100 if you hold the bond on its maturity date – this is you getting back the original £100 loan you made to the government in exchange for that whopping 75p interest per year.

In negative-yielding bond world though, successful bidders paid the government an average price of £102.38 for gilts with a face value of £100. It’s the price they paid that plonks us into negative-yield territory.


Look at the graph of the yield curve. For instance

http://www.worldgovernmentbonds.com/cou ... d-kingdom/

I am not denying it is low, or even negative in places, but to claim the Gilt market is under full control of the BofE is nonsense. If it was why would they have any section of it >0%?

If anyone thinks the authorities, in whatever form that is represented has complete control now, and into the future in perpetuity, they are deluded.

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Re: Increased tax, higher unemployment & economic difficulties

#360402

Postby NeilW » November 26th, 2020, 6:04 pm

dealtn wrote:Why aren't the issuing with zero coupons then, and saving even more interest expenditure?


KPI 1.1 of the Debt Management Office's policy remit.

The BoE hasn't decided to go to zero yet with its monetary policy.
Last edited by NeilW on November 26th, 2020, 6:15 pm, edited 1 time in total.

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Re: Increased tax, higher unemployment & economic difficulties

#360403

Postby NeilW » November 26th, 2020, 6:07 pm

dealtn wrote:If anyone thinks the authorities, in whatever form that is represented has complete control now, and into the future in perpetuity, they are deluded.


I've given you the mechanism. A set price for all Gilts as a standing purchase offer for every Gilt in issue from the Bank of England. That stops the yield on any of those Gilts going above the prescribed rate. That sets a curve. It can go lower, but not higher.

Entirely up to the Bank of England whether they go down that road, or continue to buy quantities as they are doing now.

But they can, and if they do nobody can stop them.

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Re: Increased tax, higher unemployment & economic difficulties

#360404

Postby NeilW » November 26th, 2020, 6:09 pm

GoSeigen wrote:The bond vigilantes are giving the BoE a driving lesson -- when it's time to go home they will turn the juggernaut right round.

GS


By what mechanism? For yields to go up prices have to go down. If prices go down, then the BoE will QE the bond out of existence reducing the supply, eliminating income from the private sector and saving the government money. That replaces a fixed income debt with a floating rate debt at the Bank of England's base rate - which might be negative in a month or so (if the Bills market is anything to go by).

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Re: Increased tax, higher unemployment & economic difficulties

#360406

Postby NeilW » November 26th, 2020, 6:12 pm

Lootman wrote:They can be fickle and dump their gilts if the prospects for UK interest rates or sterling looks bad..


They can only dump them for Sterling, and that is of no concern anyway since issuing Gilts is a policy choice.

The technical note I put in above answers the capital flow issue.

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Re: Increased tax, higher unemployment & economic difficulties

#360407

Postby Lootman » November 26th, 2020, 6:16 pm

NeilW wrote:
Lootman wrote:They can be fickle and dump their gilts if the prospects for UK interest rates or sterling looks bad..

They can only dump them for Sterling, and that is of no concern anyway since issuing Gilts is a policy choice.

They can dump gilts and then dump the sterling proceeds for another currency.

And it would be a concern because that would mean the new gilts offered for sale would have to offer a higher interest rate, costing the government more to service its debt.

So all in all, the UK government is very dependent on the appetite of foreign investors for gilts and, by estension, sterling as well. Bill Clinton said he wanted to be reincarnated as the bond market for a reason.

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Re: Increased tax, higher unemployment & economic difficulties

#360420

Postby dealtn » November 26th, 2020, 6:54 pm

NeilW wrote:
GoSeigen wrote:The bond vigilantes are giving the BoE a driving lesson -- when it's time to go home they will turn the juggernaut right round.

GS


By what mechanism? For yields to go up prices have to go down. If prices go down, then the BoE will QE the bond out of existence reducing the supply, eliminating income from the private sector and saving the government money. That replaces a fixed income debt with a floating rate debt at the Bank of England's base rate - which might be negative in a month or so (if the Bills market is anything to go by).


So yet again. Tell me when that will happen? Every week or so you prophesise that the future will be like this it really is extremely unlikely. Like you think above that yields will only go down and yet funnily enough they are higher across the curve than they were a month ago.

If you really think the BofE will replace a yield curve of multiple maturities of up to 50 years with some form of 1 month T-Bills market you are frankly deluded.

Explain the mechanism (as you so often make a demand on others) where in the real world this can or will happen (or has happened anywhere else in the world for that matter). Sticking to some kind of monetary theory, even if others don't is ok as some kind of theoretical exercise, but in the real world it simply won't happen. I would put a probability of about once in a thousand years of it being tried.

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Re: Increased tax, higher unemployment & economic difficulties

#360422

Postby dealtn » November 26th, 2020, 6:56 pm

NeilW wrote:
dealtn wrote:Why aren't the issuing with zero coupons then, and saving even more interest expenditure?


KPI 1.1 of the Debt Management Office's policy remit.

The BoE hasn't decided to go to zero yet with its monetary policy.


Correct it is at 0.1%, so why doesn't it issue with yields or coupons at 0.1% across the yield curve, and if yields did drop to 0.0% how would it achieve that 0.0% across the yield curve when it can't achieve uniformity at any other policy rate?

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Re: Increased tax, higher unemployment & economic difficulties

#360472

Postby AsleepInYorkshire » November 26th, 2020, 11:33 pm

dealtn wrote:
NeilW wrote:
dealtn wrote:Why aren't the issuing with zero coupons then, and saving even more interest expenditure?


KPI 1.1 of the Debt Management Office's policy remit.

The BoE hasn't decided to go to zero yet with its monetary policy.


Correct it is at 0.1%, so why doesn't it issue with yields or coupons at 0.1% across the yield curve, and if yields did drop to 0.0% how would it achieve that 0.0% across the yield curve when it can't achieve uniformity at any other policy rate?

If public spending was £100, how would it be split?
At present, the government can borrow cheaply to plug the gap. But not forever. Rishi Sunak has already indicated he'll be looking to raise taxes - not yet, (for it's more than the economy could stand ) but in the years ahead. The chancellor may still be doling out cash - but payback is coming.

Broadly speaking I think we have a few years of low interest rates left. After which we have to face the cost of Covid, the collapse of our banks and our general malaise regarding our standard of living. I'd be interested to hear if you have any model of the future which you favour as perhaps being the most reliable. Interest rates cannot remain low forever.

If during an extended period of low interest rates "we" speculate on stocks are we creating a "stock bubble"?

AiY

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Re: Increased tax, higher unemployment & economic difficulties

#360489

Postby NeilW » November 27th, 2020, 6:16 am

Lootman wrote:They can dump gilts and then dump the sterling proceeds for another currency.


Not unless there is somebody coming in the other direction. And then you have to ask why they are coming in the other direction. Then you realise the dynamic flow provides a floor on a major currency because exporters need to export and the Kenyan central bank issuing 1000 shillings to purchase billions of pounds which they then lock away shifts the exchange rate massively.

Exporters need to export.


And it would be a concern because that would mean the new gilts offered for sale would have to offer a higher interest rate, costing the government more to service its debt.


No mechanism for that to happen with a Bank of England capable of doing QE. For yields to go up, prices have to go down. Once they go down the BoE removes the Gilt which reduces the supply. So prices go back up.

So all in all, the UK government is very dependent on the appetite of foreign investors for gilts and, by estension, sterling as well. Bill Clinton said he wanted to be reincarnated as the bond market for a reason.


You may have a belief but you don't have a physical market mechanism by which that can happen - against a well informed central bank. And the UK central bank is pretty well informed these days.

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Re: Increased tax, higher unemployment & economic difficulties

#360490

Postby NeilW » November 27th, 2020, 6:17 am

AsleepInYorkshire wrote:Broadly speaking I think we have a few years of low interest rates left.


Given interest rates are a policy choice how can that be without a boom that the BoE is trying to quell with interest rate rises?

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Re: Increased tax, higher unemployment & economic difficulties

#360491

Postby NeilW » November 27th, 2020, 6:21 am

dealtn wrote:Correct it is at 0.1%, so why doesn't it issue with yields or coupons at 0.1% across the yield curve, and if yields did drop to 0.0% how would it achieve that 0.0% across the yield curve when it can't achieve uniformity at any other policy rate?


Because BoE monetary policy has decided not to do that yet. Base rates, Treasury Bill issues and Gilt issues are monetary policy instruments. They are managing the yield curve with positive rates. That's what QE does.
Last edited by NeilW on November 27th, 2020, 6:21 am, edited 1 time in total.

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Re: Increased tax, higher unemployment & economic difficulties

#360492

Postby GoSeigen » November 27th, 2020, 6:21 am

NeilW wrote:
GoSeigen wrote:The bond vigilantes are giving the BoE a driving lesson -- when it's time to go home they will turn the juggernaut right round.

GS


By what mechanism? For yields to go up prices have to go down. If prices go down, then the BoE will QE the bond out of existence reducing the supply,



NeilW has explained the mechanism himself: gilt holders (bond vigilantes) do not have to accept the price the BoE bids at.

Sorry I assume here that people understand what QE is: it is the government selling money in exchange for gilts. Personally I don't hold gilts any more. When the time comes to buy I think I will be doing so at several percent yields, not at 0. If the smart money acts the same way QE is screwed.

GS

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Re: Increased tax, higher unemployment & economic difficulties

#360493

Postby NeilW » November 27th, 2020, 6:35 am

dealtn wrote:So yet again. Tell me when that will happen?


It's happening now. That's what QE is doing - pushing down the yield curve in certain places in pursuit of the Bank's monetary policy.
Explain the mechanism (as you so often make a demand on others) where in the real world this can or will happen


That's what QE is doing. They pick certain maturities and purchase them to reduce the supply of that Gilt forcing the price up and the yield down to move the yield curve at that point where they want it. Then they lend those Gilts to the DMO who can fine tune the position in the Gilt repo market ahead of the auctions.

The net result of active cash management is that DMO can actually end up with the interest cost less than if they have just run a Ways and Means balance.

Positive net interest after cost of funds has been recorded by virtue of funding the Exchequer’s daily cash needs in the wholesale money markets at rates that have been on average below the DMA’s internal cost of funds (Bank Rate) and from investing surpluses at market rates that were on average above this.


DMO Annual Review 2020, pp p37 https://www.dmo.gov.uk/media/17019/gar1920.pdf

Can I ask you something else, since you've run a GEMM? Where does the GEMM get their cash balances from to buy the Gilts in the auction? And if they borrow from a bank what do they use as collateral?

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Re: Increased tax, higher unemployment & economic difficulties

#360494

Postby NeilW » November 27th, 2020, 6:38 am

GoSeigen wrote:[
NeilW has explained the mechanism himself: gilt holders (bond vigilantes) do not have to accept the price the BoE bids at.


Which necessarily means they hold (which reduces supply in the market), or they accept a lower price from somebody else - since by definition at that point the BoE is offering the best price in the market.

Arbitrageurs will then sort out the differential.

Or they get a higher price at a lower yield...

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Re: Increased tax, higher unemployment & economic difficulties

#360500

Postby TUK020 » November 27th, 2020, 7:19 am

NeilW wrote:Exporters need to export.

Ah, but we can fix that with Brexit

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Re: Increased tax, higher unemployment & economic difficulties

#360512

Postby dealtn » November 27th, 2020, 8:41 am

NeilW wrote:
Can I ask you something else, since you've run a GEMM? Where does the GEMM get their cash balances from to buy the Gilts in the auction? And if they borrow from a bank what do they use as collateral?


Well typically the GEMM will run a broadly flat position, although that isn't possible absolutely on every gilt on a an "every day" basis. The cash position of a GEMM is broadly flat, a few million positive/negative (well in the range -£100m - +£100m but more often a quarter of that, if that's considered a few million, but in the terms of the size of the Balance Sheet it is).

The funding will come from the repo market typically, with gilts trading at t+1 settlement and repo at t. Many positions are long one gilt against short another. The cash isn't a big component of that with a repo/reverse repo net pairing taking place across the market with GEMMs and Commercial Banks with opposing positions.

GEMMs broadly speaking are facilitators of a market where they are the only counterparty able to deal with the DMO (acting as agent of the Government) in Gilt issuance auctions, and broadly speaking (but not strictly true) in the reverse situation where the APF (acting as agent for the BOE who in turn are acting as agent for the Government) in "QE". In effect GEMMs will be net selling Gilts in the market, to other GEMMs and mainly Commercial Banks/Financial Institutions in the lead up to, and post an auction, and the opposite on APF days.

So in answer to your question a GEMM will only have a small cash requirement daily, will fund this almost exclusively from the repo market, and effectively any collateral is Government paper.

I'm not sure what your thinking is, and where it is relevant, but aside from settlement mechanisms, the question is more applicable I would think to holders of Gilts which GEMMs aren't particularly.

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Re: Increased tax, higher unemployment & economic difficulties

#360619

Postby Lootman » November 27th, 2020, 1:36 pm

NeilW wrote:
Lootman wrote:They can dump gilts and then dump the sterling proceeds for another currency.

Not unless there is somebody coming in the other direction. And then you have to ask why they are coming in the other direction. Then you realise the dynamic flow provides a floor on a major currency because exporters need to export and the Kenyan central bank issuing 1000 shillings to purchase billions of pounds which they then lock away shifts the exchange rate massively.

Exporters need to export.

This debate is futile because you are looking at things entirely from the point of view of institutions, whereas I am looking at things from an investor point of view.

If you are going to ignore the power and influence of markets and market makers then I will have to ignore your comments.


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