You have nothing to lose but your yields!
The Bank of England released a statement this morning explaining a puzzling and worrying failure yesterday (weâll cover the statement in more detail later).
The failure was in the bankâs brand spanking new bond-buying programme. Thatâs the one announced in last weekâs raft of measures to âstimulateâ the UK economy and save it from the negative consequences of Brexit which are, as yet, mostly in the sentiments of businesses and consumers.
But back to the bond failure! The bank wants to add ÂŁ60bn in governments bonds over the next six months. Thatâs on top of the ÂŁ435bn the bank already owns. The bankâs plan, which looked good on paper, was to simply wade into the bond market and buy whatever anyone was selling.
Simple enough right? After all, when you own the printing press, money is no object. People are selling. You buy at any price. Thereâs no reason it shouldnât work.
Trouble is, the bank couldnât find enough sellers yesterday to meet its first purchase target. It went looking for bonds with maturities of 15 years or more, and it couldnât find enough sellers. The bond vigilantes are back! Except this time, rather than not buying, theyâre refusing to sell!
Maybe the bank will simply wave more money in their face today. In fact, thatâs what happened yesterday.
A few cheeky sellers upped the price and got above market prices. Itâs not a bad strategy if the bank is willing to buy from you at any price. Itâs also an example of central bank policies have tended to favour owners of financial assets over savers.
But step back for a second and ask yourself what this early failure means. No, itâs not an unmitigated disaster. Not yet. But it tells you that some buyers of longer-date government bonds actually need the yield on those bonds. Iâm talking about pension funds and insurance companies who need to match the duration of their liabilities with their assets.
The bank is not concerned with the problems of individual Britons as they plan for the future. But you should be. Yields on ten-year gilts fell to a record low of 0.56% during Tuesday trading; 30-year gilts fell to 1.39%.
Itâs not hard to see whatâs happening: speculators are betting the BoE will buy more bonds, driving prices up and yields ever lower (bond prices moving inversely to yields).
All which begs the question: will British bond yields go negative? Mark Carney doesnât like the idea, but he may come around. The âlower boundâ may not be low enough for a man whoâs quickly running out of monetary tricks. The bond market knows this â or is at least guessing it.
In the meantime, how long do you think it will be before âbond hoardersâ are demonised the way âcash hoardersâ are? It might be a while, if only because most people donât carry around gilts in their wallet. But the principle is the same, and itâs not good.
Investors, pensioners, savers and retirees trying to be prudent have never had it so miserable. This is the financial repression Tim Price wrote about last week. Itâs not on the way â itâs already here. And itâs probably going to get a lot worse before it gets better.
Category: Economics