Thursday, 5 March 2009

Gordon's Gilts & Indigestion

It is reported that quantitative easing, printing money in plain English, will be signed off today by an exchange of letters between the BoE and HMT. It will work as I described previously, HMG issues gilts, BoE prints money, BoE uses this newly printed money to buy the gilts, Gordon gets the the money, Gordon spends the money and by so doing Gordon saves the world. Ho-Hum!

Yesterday the DMO, Gordon's Gilt issuing department, offered the market £2.25 bn of 30 year maturity gilts by a tender auction. The lowest accepted price was £95.08, a yield of 4.55% was £1 cheaper than the average price of £96.12, a yield of 4.485%, a yield tail of 6.5 basis points the widest for a conventional gilt auction since 1995. This indicates a weak demand for Gordons gilts, The auction was 1.48 times covered so roughly one third of the bids were at a lower price than £95.08 and correspondingly higher yield than 4.485%.

Investors did not rush to buy these bonds firstly because they are worried by the huge supply of gilts coming down the track. Gilt issuance is set to rise to a record £146 bn this year, three times last years figure! Increased supply means reduced prices means higher yields. Secondly, printing money causes inflation, ask Robert Mugabe, so by the end of 30 years your £100 gilt might only be worth £1 in 2009 money, not a great investment. Hence the comment from UBS that "the auction was massively dire" and one of the worst auctions in 10 years for poor demand. Investors are getting gilt indigestion.

The end result is that 30 year gilt yields rose 20 basis points. Gordon will have to issue shorter and shorter gilts which have to be rolled over more frequently. We are rapidly turning into a third world country a la Greece!

The BoE's quantitative easing is reported to involve buying a further £150bn of Gilts. These will be short dates in of 2 to 5 year tenor.

In total Gordon will be spending £300bn of borrowed money this coming year. How will this ever be repaid?

That's the way the money goes, pop goes the weasel!

No comments: