Who will buy my lovely bonds?

So it happened yesterday. It was the first market warning, the first inkling of trouble. Is it the first shockwave in a larger earthquake, or will the authorities take heed and shift to stronger ground?

The failure to sell all their offering of long dated government stock – a 40 year IOU which we the taxpayers have to pay interest on for that whole time period and then repay the capital – comes as no surprise to readers of this blog. What else could you expect?

We had comfirmation yesterday that they have sold £145 billion of IOUs so far in 2008-9 financial year, as well as billions in National Savings. I think that reinforces the £157 billion figure for this year’s borrowing I have been using (lifted from government documents), rather than the £78 billion the media and Chancellor have been using. That is, by the way well over 10% of National Income!

The auction flop was either incompetence or naughtiness by the authorities. It all goes back to Gordon Brown’s wrecking of the financial architecture when he first arrived in 11 Downing Street. He took debt issue away from the Bank of England and gave it to the Treasury. More recently the Bank has been given the task of printing the fivers and buying up the government’s own debt to keep the market up. Clearly this week the left hand of the Treasury and the right hand of the Bank were uncoordinated, did not understand what each other was doing.

In one clumsy move the Bank and the Treasury wiped out all the “gains” they had made in the government debt market by buying up government bonds with printed money. Prices fell back to where they were before the government buying as news came out that they had not managed to sell all their offer. The Governor also did his bit to undermine prices by saying he might not spend all the £75 billion after all. That is monumental incompetence. Surely you can sell all a gilt issue if the government itself is a massive buyer of gilts?

The Treasury decided to offer a very long IOU. The Bank is not buying long ones. The Treasury presumably thought the Pension Funds, effectively made to buy long government debt by the Regulator and the Actuaries now so many funds are “mature” (closed to you and me), would welcome something that long. Despite the pressure to buy these lovely gilts, clearly pension fund managers are thinking twice about lending so much at so low a rate of interest to the government.

So it was either incomeptence, or the Bank and Treasury had hatched a plot to have a little failure to warn the Prime Minister against more reckless borrowing. When in doubt, go for incompetence as the explanation.


  1. Simon D
    March 26, 2009

    Oh dear! Talk about straws in the wind and inability to buck markets. Just think of all those nasty US hedge fund managers already plotting to make millions from the collapse of sterling.

    What a blessing it is to know that the Prime Minister has a grand plan to protect us from our follies and help us sleep soundly at night. I must make a note to vote for him in the next election – its only about twelve months away.

  2. alan jutson
    March 26, 2009

    Simple reason for failure.
    Too low interest, at too higher risk with this Government in charge.

  3. Brian Tomkinson
    March 26, 2009

    If the government can’t sell gilts to finance its colossal debt how long before the IMF have to come and bail us out? Perhaps we need them to in order to sort out the mess, just as they did with Healey in the 70s.

  4. Sir Graphus
    March 26, 2009

    Time for a motion of no confidence: not because you’ll win it, but because the market passed a motion of no confidence yesterday, and it didn’t really make the TV news. Peston wrote on the BBC website that we shouldn’t really worry about it (a disgrace to objective journalism), while Newsnight led on Iraq. You need to introduce phrases like “no confidence in this govt” to the public, and acquaint them with the reality that this govt is crumbling.

    1. Brian Tomkinson
      March 26, 2009

      I don’t think the Conservative leadership wants an election until June 2010 just like Brown. We are on our own!

    2. Stuart Fairney
      March 26, 2009

      The radio 5 summing up of yesterday’s PMQ’s was also ‘parallel universe’ stuff. They seemed to think that completely ignoring questions and trotting out pre-prepared soundbites and tractor production statistics in a shrill voice is accountable government?

      Several BBC journalists rather reminded me of Bertram Scudder

  5. Ian Jones
    March 26, 2009

    I am guessing Darling put Mr King up to the job of calling time on more spending. No doubt Brown thought he had discovered the holy grail for election time of printing cash to buy Govt debt and thankfully Darling put a stop to it.

    I do wonder where all the cash to buy Govt debt will come from this year as the US looks to buy and roll over around 2 to 3 TRILLION and every other country is borrowing like mad. Can only mean one thing, crowding out of the private sector, much higher long term interest rates and low investment. Meaning low growth and higher unemployment, all to dig Brown out of his mess.

  6. kinglear
    March 26, 2009

    Incompetence almost certainly. For such a small residual, they could easily have twisted someone’s arm if they wanted to – which makes me think they shied away from doing it once they saw the outcome and the obvious potential to “look” as if they were extremely clever and hatching a plot.

  7. Lola
    March 26, 2009

    What price a pension fund strike? If a lot of funds refused to countenace the sided and just plain wrong regulatory dictated asset matching requirements and accounting nonsenses and collectively told the FSA etc that they were no longer going to play this stupid game what exactly could the FSA do?

    The FSA and the GAD have no monopoly on the rightness of ideas. The free marker positive feedback system with lots of agents trying innovations and ideas is much more likely to get it right than a section of the FSA’s 2200 apparathiks.

    1. Acorn
      March 26, 2009

      Lola, it was interesting to see that John Lewis is issuing a 10 year bond to raise £250 million. The media is saying that it will be around 5 – 5.25 % over, presumably the 10 year Guilt yield. So it is costing them about 8.5%. If one of this countries premier retailers is paying this rate for money, I hate to think what the little companies are paying.

      BTW. I have today received spam telling me I can now invest in the spread between US bank debt which is guaranteed by the US government; and, the debt which is not guaranteed by Uncle Sam. I apparently will make a bundle when the banks recover, as the spread between the toxic and the non-toxic will disappear.

      I applaud your last paragraph, the markets always find ways to rescue themselves. When governments interfere, it is near impossible for markets to assess the risk. Everyone stashes the cash and raises the risk premium on everything and waits for the next political shoe to drop.

  8. […] Go here to see the original: Who will buy my lovely bonds? […]

  9. Demetrius
    March 26, 2009

    1976? Oh I remember it well. It was a long hot summer. Drought, fires, rampant inflation, and all that. It was when I first became attracted to Chaos Theory. What a pity that some of the young political tyro’s of the time could not be bothered with it. They might have learned something.

  10. Pete Chown
    March 26, 2009

    I’m just curious, what interest rate was on offer on this bond? Presumably the government expects that the average interest rate over forty years will be higher than the current spot rate. But how much higher?

    Reply: 4.25%

  11. Mike Wilson
    March 26, 2009

    The markets are delivering their verdict on Gordon Brown. When are the senior conservative politicians in this country going to do the same.

    Like Daniel Hannan, Conservative MEP did in Strasbourg the other day.


    He takes Brown apart in this speech – and Brown had to sit there and take it – grinning like a fool as his record and his current performance was savaged.

    Why can’t David Cameron do this?

    1. James Morrison
      March 26, 2009

      Agreed, Daniel Hannan’s speech was brilliant. David Cameron won’t do it because, sadly, the Tories do not offer us any alternative. Sorry that is a bit harsh on JR and a few others, but the Tories who hold the power in the party at the moment can best be summed up by Cameron’s assurance that he is “the heir to Blair”…..

      The next election will give us all a choice between Nu Labour and Blue Labour, plain and simple.

      1. Mike Wilson
        March 26, 2009

        I find it frustrating. If Cameron doesn’t take this opportunity to discredit Brown, there is a chance that things will have bottomed out by 2010 – Labour will play the ‘you don’t want a couple of inexperienced Old Etonian twits running the country’ card – and, (where is my exit visa) – this lot get another term to further ruin the country.

        Until now I’ve though Cameron’s waiting game was spot on – but the mess Brown is getting us into now with his incessant borrowing has to be opposed.

        In 2003 Vince Cable warned Brown about the state of the nation’s finances – in particular the growth in personal debt. Brown laughed in his face and told him he knew more about running the country’s finances than Cable.

        To take Daniel Hannan’s analogy further, I can see Brown standing on deck, saluting with that awful smile on his face, as the ship finally sinks below the waves as the burden of debt finally makes the ship too heavy.

        Is Daniel Hannan the ONLY person who is going to point out the Emperor has no clothes on?

        Reply: What do you think I have been doing for the last year in the Commons? And haven’t you noticed David Cameron’s strong questions on debt and disaster, and the Opposition day debate on this topic last week?

        1. Mike Wilson
          March 27, 2009

          With all due respect Mr. Redwood, your actions in the Commons do not reach the country. I am sure, within the framework you senior guys have agreed, you have been criticising the government.

          But the speech made by Daniel Hannan was masterful – like a boxer finishing off the guy on the ropes.

          Over a MILLION hits on YouTube now for his speech. ZanuLabour seem to have an iron grip on the BBC and Channel 4. Great to see that the internet is slowly but surely making them redundant.

          I think the message from the Opposition should be kept simple and endlessly repeated – like Brown’s nonsensical ‘do nothing’ jibes at you.

          “Brown has led this country into disaster – and with ever action he takes – he is making it worse.”

          This is a pretty safe bet as a message because things are going to get worse.

          Brown and his cabal spout ‘global problem – global solution – tories would do nothing’ all the time.

          It’s time his record was properly rubbished – all the time – in the same way that Daniel Hannan did in Strasbourg.

          Reply: Yes, I too admire Daniel’s speech. To show others of us also make strong speeches about the current mess, I am going to put a video version of my last Commons speech on the economy on here, to supplement the text, to see if that appeases you!

  12. oldtimer
    March 26, 2009

    I think the idea it was an accident, but on purpose, deserves consideration.

  13. Adrian Peirson
    March 26, 2009

    What exactly backs Govt Gilts, Surely it is our Taxes, IE we and our children have just been enslaved, without us having a voice in the matter.

    If Govt Borrows £100 Billion, it has to pay back £100 Billion PLUS INTEREST, If the Private Banks have a monopoly on printing money ( out of thin air ), where does the Money come from to pay back this debt plus the Interest.

    It can only come from Borrowing more money, this is why Govt Debt can never be repaid, it can only increase ( just as it has done ) and why unbacked fiat currencies must Always spiral into oblivion, just like we see happening now.

    There is a solution, simply tell the International Banksters they conjured their money out of fractional reserve thin air, all we owe them is for the paper it’s printed on, Give them £1 Million and tell them to keep the change.

    Debt paid off. Sorted.

    Of course when you tell them this you should have a squad of SAS with you, unless you want to end up like JFK did, five months after signing Executive order 11110 ordereing the US Treasury to begin issuing its own currency, free of charge rather than Borrow it from the PRIVATE Federal reserve.

    1. StevenL
      March 26, 2009

      What do you think ‘quantitative easing’ and central bank balance sheet expansion is if it not creating new money out of thin air?

      The USA, Japan, the UK are already at it from what I understand and it looks like the EU and the Swiss might join in.

      What you’re saying is that the UK should default on it’s debts. These debts are not all held by ‘international banksters’ Adrian. The norm is that when you approach 5 years away from retirement your pension fund move your life savings into government bonds.

      You are suggesting robbing millions of 60 year old working class people for just about everything they have and if you can’t understand these simple facts rather than just spout your conspiracy theories then I feel very sorry for you.

      Mind you, I guess printing money could be seen as the same thing if the intention is to create an inflationary cycle in order to help governments, businesses and consumers deleverage.

      Is it any wonder the Chinese are calling for a new reserve currency? Perhaps they could use it to store peoples pension pots as they approach retirement to keep it safe from desperate governments.

    2. Freddy
      March 26, 2009

      “What exactly backs Govt Gilts, Surely it is our Taxes”
      No, it is the Bank of England’s ability to create money.

      “If the Private Banks have a monopoly on printing money”
      They don’t. Only the Bank of England can create money; private banks cannot do so.

      Please go and study the diference between Fractional Reserve Ratios and Capital Adequacy Ratios.

      1. Adrian Peirson
        March 27, 2009

        Obviously you do not know that the Bank of England, just like the Federal Reserve is a Private Company run entirely for Ofshore interests.


  14. chris southern
    March 26, 2009

    The gilt bubble has been ready to burst for some time, we are now witnessing the start of it.
    The housing market bubble may have hurt those caught up in it (as well as savers,) but the gilt bubble will effect us all, especialy as the public sector is growing.

  15. mikestallard
    March 26, 2009

    In all fairness our host has been warning us that this was going to happen: Mr Brown issuing IOUs when he has not got the ability to honour them is bound to end in tears.
    Money lenders are not – and never have been – stupid people. They make it their business to know.
    My own problem is this: is Mr Brown man enough to heed the warning of the unwanted gilts? Apparently, he has decided to cut back on government borrowing. But we shall see.

    PS I do hope that his enormous (and utterly justified) success has not gone to young Mr Hannan’s head.

  16. […] rates will have to rise sharply in the medium term (18 to 48 months), to enable the government to cover the huge borrowings, whilst competing for funds against other countries. We are heading for budget deficits well in […]

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