Author: johnredwood

I have often been asked recently to explain how bonds work and why the market fell this autumn.

The government needs to borrow money for spending in excess of tax revenues. The Treasury (Debt Management Office) issues bonds or gilts.  It borrows money from investors, offering them interest and a repayment date for the loan. People and investment funds buy the amount of these big issues they want. The normal bond called a gilt offers a fixed rate of interest with regular cash payments of interest to the holders. The bond has a repayment date so you can choose to invest for a shorter time period or for many years.

If you change your mind and want to get your money back before the bond repays you can sell it to someone else in the market. If interest rates are unchanged since you bought it you can sell it for what you paid for it. If interest rates have gone up you will sell it at a loss. If you bought a 1% 1 year  bond for £100 when 1 year interest rates were 1% you would sell it for £99 if rates went to 2% immediately. The buyer would want the £1 capital gain on repayment of the £100 as well as the £1 of interest he would receive by buying it at £99. If you had bought a bond that repays in 50 years time or longer you would experience a much bigger loss as the buyer would need a large capital gain to offset 50 years of too little interest. Roughly you would lose half your investment.

The Bank of England exerts huge control over this market. The Bank owns around one third of all the bonds government has issued following its huge bond buying programmes. It fixes the interest rate for short term borrowing and  strongly influences interest rates for longer term borrowing. All the time from March 2020 to end 2021 that it was a big buyer of bonds it drove prices of short and long bonds up. This meant ever lower interest rates available to any investor wanting to buy a bond. Many sold out to the Bank seeing the prices were crazily too high.

In the run up to the Truss growth package both the US Fed and the Bank of England were talking their bond markets down. Both wanted interest rates higher and were threatening further large rises in the rates they set. They got the markets falling. The ten year UK bond rate started to rise from offering an income of 3.1% on September 19th following the Fed.  The Bank of England the day before the Growth Statement on 22 September went further and announced it planned to get rid of £80 bn of bonds over the next year, which was bound to drive prices down further. This created turbulence which forced some pension funds to have to  sell bonds in a hurry to find the cash to cover their losses on so called LDI funds. These funds own more bonds than they can afford to pay for by using  futures. Fast falls in price require them to make payments to cover losses.

It is true the absence of reduced spending plans and of borrowing figures in the Growth Plan led to a further decline in prices after the announcement on 23 rd, but this followed a week of falls in response to the Bank wanting bonds down.More falls followed mainly owing to the LDI panic. The ten year interest rate hit 4.5%.  The Bank showed it controlled the market by sharply reversing the falls with an intervention on 28 th announcing suspension of bond sales. The ten year rate is now where it was on September 19 th before the Bank said wanted rates higher, back at 3.1%.

The two biggest influences causing the falls in bonds up to 28th September were the Bank of England deliberately driving the price of bonds down to raise interest rates, and the LDI/pension funds having to sell bonds as they scrambled to deal with their overcommitted positions. The markets rallied only when the Bank said it wanted rates lower and bond prices up proving its power.

When I am busier than usual I will just delete posts with long paras of densely written material and or with links I do not recognise. I do not have time to word count or count multiple postings. It is quicker just to approve them if I can see immediately they do not make potentially false allegations about named people or institutions. I do not censor views from other political perspectives and allow plenty of criticisms of government. I do give myself the same protection as anyone else from personal abuse and the worst false allegations.

Four of the big five Central Banks have undertaken money creation and bond buying – the  US Fed, the  European Central Bank,  the Bank of Japan and  the Bank of England. The Peoples Bank of China thought it a bad idea. Three of them are sitting on huge losses on the value of their bond portfolios – US, ECB, UK. The same three are also  losing money daily on the gap between the income the bonds earn and the cost of commercial bank reserves placed with them now they have raised interest rates. The capital losses on the bonds are much bigger than the running losses on the interest charges.

           There is no need to accelerate and worsen the large losses by taking them early through market sales of the bonds.   The Bank of Japan with the largest bond portfolio relative to the size of the economy has kept rates at zero so does not have the same problems. It intends to keep rates at zero to avoid these issues. It can still afford to do so as it did not balloon the money supply in the way the other three did causing excessive inflation, though Japanese inflation has reached an unusually high but probably temporary level of 3.7% recently. China has inflation at 2.1% showing that a large energy importer did not need to have inflation , because they had a money target for their Bank and kept it under good control.

 

            All three  Central banks with losses are sitting on negative capital were they to take the losses. This has led to a divergence in approach. The US Fed has ploughed on with aggressive rate rises and with sales of the bonds into a falling market, taking large loses as a result. The US Treasury refuses to reimburse the Fed for the losses and says it does not matter if the realised bond losses exceed the capital of the Bank, as they will quite soon. They rightly argue a central Bank cannot go bust, as it can always create money to pay its bills. The US Fed will account for the losses in a special way to allow the Central Bank to carry on as if nothing has happened. In contrast the ECB , alarmed by potential losses and the adverse impact of selling bonds into a falling market refuses to sell bonds at a loss. Meanwhile the ECB itself is telling the member states Central Banks that “own” the ECB they will be responsible for 80% of  the losses made on repayment of bonds by governments as they fall due. The member states central banks will come to their own view of whether to ask for capital  grants from their governments or whether to adopt the US approach of just leaving the losses within the accounts of the Central Bank.

 

           Only the UK is burdening the Treasury and taxpayers with totally unacceptable losses for no good reason. Money policy does not need sales of bonds. They will run off at a slower pace and with lower overall losses if just held to repayment. There is no need to recapitalise the Bank from tax revenues as this happens. You can follow the Fed. This has always been a policy controlled by the Treasury, with the Bank stating clearly on its website that it carries out the bond buying – and therefore selling – for the Treasury as agent. It has always needed Chancellor sign off.

I am deleting more of these without reading them.

I have long been an advocate of growth. I have always been clear the growth I want is in income per head, not in the number of people. I have advocated the higher wage higher productivity economy. I have opposed illegal migration. I have opposed mass legal migration into low paid jobs. This suppresses labour saving investment, keeps wages down and impedes training and levelling up.

I have also been a long term and sometimes a lone voice pointing out if we keep on inviting more people into the country we need to put in a lot more energy capacity, reservoirs, roads, schools, hospitals and homes to provide for them. I have explained that cheap labour from abroad is dear labour for the taxpayers as it entails many more subsidised homes and public services.

The numbers for the last year are far too high. If we invite in 500,000 extra a year we need to build a city the size of Liverpool every year and provide all the supplies and facilities it needs. Where is our new city for last year’s people? No wonder our hotels are being taken over for dwellings and so many fields are coming under the concrete mixer.

The government wants to cut CO 2 output. Then start with fewer migrants. It wants to solve the housing shortage. Then  have fewer migrants. It wants to deal with the electricity shortage. Then have fewer people. What does it not understand about the current over the top migrant policy?

 

 

 

 

Question:
To ask the Secretary of State for Environment, Food and Rural Affairs, what steps her Department is taking to encourage more domestic food growth to help reduce the level of importation of food and the consequent impact on the environment. (83505)

Tabled on: 09 November 2022

Answer:
Mark Spencer:

The UK has a highly resilient food supply chain. We produce 61% of all the food we need, 74% of food which we can grow or rear in the UK for all or part of the year, and these figures have changed little over the last 20 years.

The Government Food Strategy, which was published in June of this year, sets out what we will do to create a more prosperous agri-food sector that delivers healthier, more sustainable and affordable food. The Food Strategy includes a commitment to broadly maintain the level of food that we produce domestically and boost production in sectors where there are the biggest opportunities. As part of this commitment, we are providing support to farmers to help improve productivity. This includes investing over £270 million in innovation by 2029 to support agricultural productivity. In addition, the £48m Farming Innovation Fund is supporting more than 43,000 farmers by providing grants which will also improve productivity.

Our high degree of food security is built on supply from diverse sources; strong domestic production as well as imports through stable trade routes. Recognising the global impact of food production, at COP26 the UK COP Presidency launched the Glasgow Leaders’ Declaration on Forests and Land Use. This declaration included the Policy Action Agenda for the Transition to Sustainable Agriculture which raised visibility of and mobilised action for transformation in agriculture, land use and food systems. Action in these areas is essential to ensuring sustainable food production for a growing population, whilst building resilience for farmers and a just transition to reduce emissions and reverse harmful impacts on biodiversity.

The answer was submitted on 21 Nov 2022 at 17:07.

 

Comment.   This is too little and lacks the energy and determinaiton needed to drive up our home market share to nearer the levels we enjoyed prior to joining the CAP in the 1970s. I will press harder to get the grant money spent on food production, not wilding.

 

Question:
To ask the Secretary of State for Environment, Food and Rural Affairs, what steps she is taking to incentivise people to increase fruit and vegetable growing capacity by (a) using modern techniques to extend growing seasons and (b) regulating water and fertiliser use. (83506)

Tabled on: 09 November 2022

Answer:
Mark Spencer:

The Government recognises the important role of high-tech growing technologies in ensuring a reliable and sustainable supply of fresh produce for much of the year. Innovation, such as the development of new plant varieties and growing systems, have already allowed growers to extend the growing seasons of a variety of crops, for example strawberries.

Our plan to support the horticulture sector was outlined in the Government Food Strategy, launched on 13th June this year. The strategy will aim to increase domestic production through the adoption of a range of growing models, such as controlled environment horticulture systems. A controlled environment can offer environmental benefits, including efficient water use and a reduction in the use of agrochemicals.

In November last year, Defra launched round one of the Farming Investment Fund, committing over £98 million worth of funding for farmers and growers to invest in farm equipment, as well as technology and infrastructure to improve productivity, growth and resilience. As part of the fund there are numerous strands which would benefit fruit and vegetable growers specifically, including a £25 million ‘Improving Farm Productivity’ theme and a £30 million ‘Adding Value’ theme. Both of which provide grant support for higher value, more complex project investments which deliver transformative improvements to farmer’s and grower’s businesses.

Having sufficient water is of vital importance for ensuring optimal yield, growth and quality of our crops. As part of the Farming Investment Fund, Defra launched the £10 million Water Management grant scheme which provides grant funding support for the construction of on-farm reservoirs and the adoption of best practice irrigation application equipment to help ensure farmers have access to water when they need it most. This will build on-farm water resilience, so helping to ensure farmers will have access to the water they need to produce adequate fruit and vegetable yields.

We are also looking at a potential future offer for the Producer Organisation Fruit and Vegetables Aid Scheme. We are currently exploring the best way to support the sector once the Scheme ends in 2025.

The answer was submitted on 21 Nov 2022 at 17:03.

 

Comment  This is more helpful but the small sums suggest it lacks ambition over scale