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.
November 27, 2022
Good Morning,
Sir J, your recent tweet is at least asking the right question, you might dig a bit further and find out the tenor of those gilts. We can safely say that the Treasury and BoE KNEW they were creating inflation, and more money sloshing around would mean a fall in relative strength. Why, to bring sterling into parity with the Euro perhaps?
Why did the BoE need to sell gilts, if they were short dates? With over ÂŁ800 Billion you’d have thought a run-off and managed replacement, by selling to commercial investors could have been arranged.
Deduction: There was a scheme ongoing, Bunter was on board, Truss wasn’t so she had to go.
Now we have technocrats, the Dynamic Duo of Downing Street, who will ‘do as they’re told’ but not by the electorate.
We now know it and the Tories will be toast at the next election
November 27, 2022
+ many Peter. This government is determined to impoverish us all in every way, by destroying our economy, our society and our culture, for NO good reason. No good reason for our country, anyway. It will benefit someone, all the freeloading immigrants and the other countries that this government throws OUR money at, but never us. We are just the cash cows and they keep coming back for more in exchange for less. There are alternatives, as Sir John explains only too well.
November 27, 2022
+1 and the only realistic alternative is even worse still.
November 27, 2022
Teresa Villers MP (on inflation busting pay rises and RPI pension) on TV saying she is voting for Hancock in jungle shows exactly how out of touch your party is on everything. An MP voting for another instead of condemning him saying he should be at work!! Villers as minister who lost ÂŁ40 million on the railways, no censure, sanction or sacking. The lack of self-awareness or public feeling in your party is astonishing. The ones that are aware are currently announcing standing down.
This Sums up how absolutely wasted your talents are JR. You are using your own time and money on a personal site explaining what is happening in the bond market while dull witless Villers fauns over Hancock!! No wonder Lord Ashcroft says the polling for your party is at the bottom of the ocean floor!
A useless minister on TV saying govt cannot afford pay rises while only two weeks ago Sunak gives away ÂŁ11.6 billion on climate reparation scam, loses ÂŁ11.8 billion to school boy errors he will not investigate, gives away another ÂŁ12 billion in overseas aid and a further ÂŁ11 billion to EU after we left!! About ÂŁ44 billion wasted in Total! How many nurses are goi g to believe your govt when wasting and giving away so much?
Taxation at 80 year high and going up, reports in papers saying Hunt has introduced a wealth tax by stealth not even Healey would instigate! Can anyone in your govt. add up let alone understand the bond market?
November 27, 2022
+1. So will all countries also get vast reparation sums from the Chinese for the king gift of Covid which it now seems almost certainly was a leak from the Wuhan Lab after incompetent âgain of functionâ experiments on bat virues.
Will the UK also get compensation for the net vast benefits of the industrial revolution? I see the UK is now sensibly importing far more coal to get us through the winter without power cuts. Let is hope it remains mild and we have enough coal fired power stations left after all the blowing up vandalism of deluded energy ministers.
November 27, 2022
Tax rates going up from the current hugely over taxed position will produce less tax, the rich and hard working will leave or work less. Even more will live of benefits and the backs of others and do a bit of cash in hand, bartering or crime on the side.
Positive feed back then produces a hugely negative outcome for all. This is the Sunak/Hunt agenda it seems.
November 27, 2022
You failed to mention the ‘gain of function’ research was funded by the US DoD.
The US has biolabs all over, including Ukraine shut by the Russians, funding research into the use of infectious diseases as bioweapons which they know is outlawed by international treaty.
There is no certainty that Covid-19 was released by the Chinese in China either by accident or design as there is no certainty that those who control the US ever stop lying.
November 27, 2022
Patrick Minford and Richard Tice on Talk Radio just now sound on this topic too.
November 27, 2022
LL,
UK should not be importing coal! UK imported over 80% of coal from Russia, even by the govtâs di witted logic that causes more harm to the planet.
I would rather have coal, like Germany, China, India, US, than be cold and not have lights on.
I note India just signed another trade deal with Russia, did Russia have to accept thousands of immigrants like Sunak did last week? No. I think Sunak made a mistake a month ago, what he meant to say was: he will serve without integrity and without telling the truth with the help of Hunt.
November 27, 2022
The other useless minister, above, was EU remainer Mark Harper MP saying how govt could not afford pay rises. Sunak can afford to give away ÂŁ44 billion though! This is the same Mark Harper who as immigration minister in 2014 had to resign for employing an illegal immigrant as a cleaner! Serving in a cabinet where other senior ministers had foreign cheap nannies! I wonder what his real view is of the invasion of illegal criminals spreading diphtheria at the moment?
We are told diphtheria pleasantly spread around the country, in 4 star hotels at taxpayersâ expense of course, from the illegal immigrants! I am sure this will help the NHS. Let us all clap together. Perhaps they might have covid as well, that would please Hunt as China currently on a brutal attack for those opposed to lock down! If we are lucky some might have criminal records or pose a threat to law and order as well. Good old ECHR still in place to stop UK controlling immigration and preventing deportations.
November 27, 2022
Shirley. Correct. The second hotel in Shrewsbury has been taken over for 120 single males. The council won get funding so I expect our council tax to rise. I wonder how many staff will lose their jobs just before Christmas and how many parties and vacations were cancelled? 3 GP surgeries will be involved in their care. Longer waiting times for us.
November 27, 2022
Should read won’t get funding.
November 27, 2022
Shirley,
It is okay they will be treated for diphtheria at our expense! Perhaps some might have covid and create lock down that will excite Hunt as China now using brutal force to impose their rules! Altogether go outside and clap.
November 27, 2022
I assume everyone in Shrewsbury is happy with their level of Care? Why do 120 young fit males need all this attention?
November 27, 2022
Shrewsbury hospital is in dire straits now. Ambulances queuing outside A&E. Operation waiting lists 3 years. Never mind. We’re only the mugs paying for it all.
November 27, 2022
Shirley: Monies to China reported ( on Breitbart ) as ÂŁ 51.7 million 2021 – Some of that likely to have been for climate change projects amongst other things, exact detail of what it was spent on not yet available. Also mentions a Tax Payers Alliance investigation found that ÂŁ 81 million sent to China mostly between 2019 & 2020.
If these reports are accurate who will make changes to this appalling use of our money.
November 27, 2022
Money to China with an appalling human rights record, slavery organ harvesting etc. currently using brutal force to impose their lock down rules! Covid for the world and UK taxpayer money being given to China while Harper and co says no money for pay rises here! How many cheap foreign workers in the employ of cabinet at the moment?
Do not forget all students have a right for the family to come here so do all those allowed to stay! It is okay Sunak says he will reduce numbers, he forgot that he agreed for thousands more from India can come here!! Hands up who believes up who believes Sunak.
November 27, 2022
+1
November 27, 2022
After 12.5 years the Tory’s still don’t live within our means. They never have. They keep giving our taxes away to welfare and all foreign causes. It’s time they went. We need a conservative alternative. Let’s all vote Reform.
November 27, 2022
The BoE was complicit in bringing down Truss. A remainer, establishment coup. Now all leave ministers are being targeted by the snivel service and Fishy is appointing labour acolytes into his government.
Nuff said.
November 27, 2022
Seems so.
November 27, 2022
+1
There are a few things the tories could do that would turn the whole ship around in three days.
Easy to think of âŠbut would they do them?
No!
November 27, 2022
Exactly! TWELVE years of Conservative government. Whatever is wrong with this country is nothing to do with the Bank of England, civil servants etc – it is 100% down to the incompetence of Conservative politicians
November 27, 2022
@ Gary Megson – Fully blameworthy though is the Conservative Government your exoneration of other actors is all too kind and it also risks leading to the erroneous supposition that replacing the Government with another might be the cure for all our ills.
November 27, 2022
Sir John: “We can fly, us Tories you know”
Peter: “I do know. I’ve seen you”
November 27, 2022
Martin ‘the UK is a mess, BUT I can fix it all with a wave of my hand’
November 27, 2022
+1
November 28, 2022
Absolutely. This was effectively a coup d’etat and there is a deliberate strategy to destabilise (even further) our economy.
I suspect it’s in order to “justify” getting us into the outer tier of a two tier EU, claiming it’s essential for economic reasons.
November 27, 2022
Good morning.
But why does the government have to keep borrowing ? Why cannot Minister control their departments budgets ?
When we borrow, it is usually to purchase a house, car or some other item that we cannot finance ourselves. We replay the loan in instalments, plus interest. We cannot go out and tax our families, friends and neighbours. This means we have to be careful about our finances.
The warnings on what was going on in the bond markets and the ability of the UK to meet its commitments was being discussed in certain circles well before Liz Truss MP become PM. It is ironic, and very unfair, thjat the man who replaced her was the same man who created the mess in the first place, although that said, none of his successor did much better.
We have a spend, spend, spend mentality at the heart of government that is sucking the life force out of the economy like some Vampire Squid đ
November 27, 2022
I am surprised that the vampire squid reference was not deleted.
November 27, 2022
Good post. Gordon Brown deserves a special mention for having introduced the idea that ‘across the economic cycle’ the New Labour government would only ‘borrow to invest’ – meaning that he would never balance a budget (apart from the first one or two when he was following Conservative fiscal plans). We need to get to a situation where governments, across the economic cycle, balance budgets. Any housewife knows this stuff – and also that anyone peddling ‘new monetary theory’ on her doorstep is best avoided.
November 27, 2022
‘But why does the government have to keep borrowing ? Why cannot Minister control their departments budgets ?’
The problem in a nutshell.
Civil Servants running the show who want to spend and damage the UK until we rejoin the Evil Empire!?
November 27, 2022
Mark B
Got it in one, they keep on borrowing in our names and our expense simply because they can, there is absolutely no advantage or reward to running a balanced budget for them, The incentive to keep on spending NHS, Benefits, etc is to try and keep the public happy in the short term, so they will get elected again.
Of course they know this cannot go on forever, but you leave the problem for the next government when you are eventually voted out.
Unlike the Population, with Personal, Commercial investment or Business spending, those politicians who borrow in our name do not have to pick up the tab, or risk losing their house, or be made bankrupt;.
As for the financial markets, the traders always win because they profit with commission on every trade, win, lose or draw.
November 27, 2022
The NHS, world service, is a mess and in need of huge reform. The Tory’s refuse to do so but keep throwing our taxes at it.
November 27, 2022
Don’t be surprised if the government starts hinting at a conversion to a co-payment insurance based funding system for health next year. The ÂŁ3,100 per person per year current cost of the UK health system, has to move to nearer ÂŁ4,500 a year to get on par with the best EU systems. The “free at the point of use leads to abuse NHS”, is going to get a dose of austerity 2.0.
November 27, 2022
John.
I have worked on trading floors for 30+ years. You are omitting the key point.
Why are the pension funds over committed to bonds?
The answer is that they need to meet high growth targets to pay for final salary pension schemes. The vast majority of which are known as âgold plated Government pensions.â
So from a traders perspective the Government pensions are now so large and over bearing on the nations finances that any small decrease in tax or increase in Government spending will cause the equivalent of a run on the Bank of England.
Ironically all those who benefit from this national pension liability are politicians and civil servants who avoid talking about this huge problem and have a vested interest in driving up liabilities further to benefit themselves.
The nation is now dangerously close to bankruptcy. The nation can be described as a pension fund with a Government attached.
November 27, 2022
If you have ever watched the films The Big Short and Margin Call about the 2007 market crash they both point at mortgage backed derivatives causing the crash. To be more precise credit default swap baskets, that swapped monthly payments for insuring baskets of North American mortgages against a number of types of defaults.
What these films omit to explain is that the credit rating agencies acted as actuaries assessing the risks of bankruptcy. However the reason they assessed the risk as too low, and mortgage costs too low, was they were using risk data based on the previous economic cycle. What was different about this economic cycle was that politicians (and specifically Clinton and Obama) had introduced the Acorn Act to force mortgage companies to give mortgages to Obama voters who could not afford them. Think of it as âwoke mortgagesâ for demographics with different views on how to handle mortgage repayments.
So thereâs this line in the film Margin Call where one of the researchers says something like, look at these numbers we are bankrupt. Those numbers were woke demographic mortgage default numbers. It was too politically sensitive to say that in the film. The bottom line is that group think surrounded all the benefits of low mortgages.
Today we are sitting on the same woke crisis. Group think surrounds all the benefits of low mortgages and financial overreach. Woke politics prevents people talking about the problem. The crisis is now caused by the Government importing millions of low rate tax payers and an ageing productive demographic needed to pay for massive pension liabilities and immigrant liabilities. The margin call is the same for Pension funds today as Credit derivatives in 2007, but this time itâs the taxpayers and not the bank paying the monthly payments. I think the same thing as the Lehman researchers in the film Margin Call. The tax payer is bankrupt.
What happens when a Government pension scheme is too big to fail?
November 27, 2022
To answer your question at the end, they don’t pay it. At least I think that is what they did in Greece. Either that or, they do what they did in Cyprus – Raid peoples personal bank accounts.
November 27, 2022
The wafer thin difference which will be manipulated under Starmer will be the transition from high tax to de facto confiscation of assets. From small hoteliers being offered ÂŁ250K to house immigrants to them being forced to take immigrants into hotels then second homes on long term “deals” isn’t a big jump.
November 27, 2022
Raid private sector workers pensions to pay their own.
November 27, 2022
Mark B : “Either that or, they do what they did in Cyprus â Raid peoples personal bank accounts.”
It’s going to happen, probably within the next Parliament, if no seismic changes to our existing uniparty Parliament.
They’re working towards this when we have taxation and poverty so high that revenues are falling. The final coup-de-grace to destroy the remaining wealth of the troublesome middle classes and democracy.
November 27, 2022
Indeed. Government and daft politicians/laws and vested interests were, as usual, the main problem.
November 27, 2022
@ Javelin – have a care to avoid blaming the 2008 GFC on mortgage borrowers, a conclusion some might reasonably construe from your words.
The cause of course was rather the use of rebundled mortgage risk securities used all too freely as collateral in the overnight repo market up until the moment it was realized the true worth was materially less than had been supposed. Certainly borrowers’ mortgages were at the root, but the borrowers were not responsible for the financial engineering that saw flawed instruments traded wantonly.
As for blaming the rating agencies, they of course rely to a great extent on the representations of issuers.
November 27, 2022
I agree formula, blaming the people at the bottom is false, thatâs like blaming people for taking advantage of buying incorrectly priced goods in a supermarket, then blaming the supermarkets pricing mistake and subsequent loss on the people that bought the goods.
However, they should never have relaxed the mortgage multiplier so much, it would have been far better to sell them half a house and rent the other half until they could afford to buy a bigger share, or spread the loan term to 35 years instead of 25 years based on what they could afford to pay per month. Iâve never understood why it had to be 25 years.
November 27, 2022
Please explain how a government pension scheme financed by its own fiat currency assets, can go broke in its own fiat currency?
November 27, 2022
Iâd like to know that too acorn? Why sell the gilts at a loss if youâre printing them?
November 27, 2022
From a currency USER point of view it looks like a loss. From the currency ISSUER point of view, the Treasury, it is just an operating cost. Once the difference is understood, you will realise that the so called government debt is actually the non government savings.
“(1) The US federal government is the issuer of the US dollar.
(2) The US federal government needs to obtain US dollars, either through collecting taxes or borrowing, before they can spend money.
But if both the above statements are true, where did the first US dollar come from? How could it be taxed by the US federal government or borrowed from anyone before the US federal government issued it into existence. The answer is that item 2 above is false.
Google “US dollars and currency ISSUER vs USERS at Money Matters”
November 27, 2022
Acorn. I think the first US Dollar came from promising to pay in gold.
The government could then borrow up to the likely amount of gold collected in the year.
December 5, 2022
NS, I hope you realise that your comment was valid when it happened in 1834, that a couple have happened since, in particular the 15 August 1971 when President Nixon suspended the convertibility $/gold.
November 27, 2022
Javelin
I fear a bloody revolution when younger workers realise they are paying more of the wages they earn into state pensions than they get to take home themselves – and that there are pensioners taking more home in pensions than young professionals get to keep in salaries.
State pensions are going to become a hot topic that will not go away.
I predicted the boat invasion correctly, I predicted the Covid/lockdown fallout correctly, I predicted the crash correctly. Huge state pensions are not going to be tolerated.
Why should they be ?
November 27, 2022
By state pensions I meant public sector ones.
November 27, 2022
When is your prediction for a) it will all be sorted ? b) a bloody riot in the streets?
November 27, 2022
The state pension is minuscule – not âhugeâ. Itâs the gold plated state employees pensions which are unsustainable.
December 5, 2022
Huge state pensions? Is ÂŁ185.15 a week huge in your book?
November 27, 2022
+1
November 28, 2022
Great comment. (And great film, which – coincidentally – I watched again just a few days ago).
November 27, 2022
Well said, Javelin. I agree that many public sector pensions are actually indecent and are unsustainable, but they make the rules to suit themselves personally. The (mostly) lower paid taxpayer who funds it all never gets a thought. Many moan that pensions savings over ÂŁ1m are taxed, but that is a huge pension, and the taxpayers have contributed the majority of it.
November 27, 2022
I wonder how many public sector pensions pay out over ÂŁ40,000 pa? When they talk averages the part-time women in the public sector always bring the average pension payouts down. Also people that only work 5 years to 10 years bring it down. They should only discuss f/t equivalent 35 year service pension costs.
November 27, 2022
Not so sure about ÂŁ1M being huge by the time people need it Shirley. A 40 year old will likely have another 25+ years before retirement and the income from ÂŁ1M by then (in real terms) may be very small. If (when?) a future Chancellor decides to raise the pension ceiling, many will have already reduced their regular pensions payments and will not be able to catch up so easily. I certainly wouldn’t want to rely on the State Pension either. As for Government Final Salary Pensions, there is no pension ‘pot’ and if there were, it would double the national debt. Not sure I’d sleep well at night knowing my pension was effectively unfunded, even if HM Gov is underwriting it…perhaps especially because they are doing so given their recent performance.
November 27, 2022
They can voluntarily contribute more, like many people have to do if they want even a reasonable pension. It is a huge liability for the tax payer, who pays the bulk of those ÂŁ1 million pension contributions, all tax free to the beneficiary (until they draw it down). It adds a great chunk to their remuneration and they have the nerve to object to the amount over ÂŁ1m being taxed. The taxpayers pay tax to fund those very generous pensions so why shouldn’t the beneficiaries pay tax on the generous benefits over ÂŁ1m?
November 27, 2022
As you state Shirley, the tax is just deferred. As for being a liability for the “tax payer” – anyone who makes provision for thier future is far from a (future) liability than those who do not!
November 27, 2022
How are previous MP & Ministers’ pensions paid, indeed so many are short-term jobs until they are thrown out?
The list of current pensioners must be enormous, what did they contribute and are widows/widowers paid a proportion after death?
November 27, 2022
âGold platedâ is just a Daily Mail term to describe what used to be standard defined benefits pensions in many large institutions – in the private sector as well as the public.
One sixtieth with inflation linked at RPI and non-contributory was the deal in a large private sector company I worked for. This was better than the civil service deal.
Pensions have been under attack for a long time now by many including, famously, Gordon Brown.
There is never the same outcry about the excesses paid to the people at the top though. Chief executives have seen their rewards rocket over the years in comparison to those of the average worker.
November 27, 2022
Indeed Pension Fund, an incompetent & very poor value NHS and a Government attached.
November 27, 2022
Chief executives of who? The FTSE? There are plenty of SME companies with CEOs who have put off taking business gains for years and year , reinvesting, squirrelling away, building, growing, selling.
Which large private sector company paid a better pension? Was it a monopoly industry? I know engineering firms now owned by their pension so they donât completely collapse, with returns falling away.
November 27, 2022
a-t,
Many private sector firms had defined benefits pensions.
My company at the time was a huge, foreign-owned, multinational in the food sector that had taken over a British-owned company in which it previously had a minority shareholding.
Over time, private sector companies dropped defined benefits schemes for new entrants. So workers bore the brunt of the financial shenanigans that undermined this particular benefit.
In the same way, youngsters nowadays bear the brunt of the inflated property price racket.
November 27, 2022
Peter, where I come from and live now didnât have the same massive property price inflation racket, a friend sold a 3 bed semi, front and back garden with a garage for ÂŁ120,000 a couple of years back. Not everywhere in the UK had the massive and inflated SE, SW and London/Oxford type boom. Yes there are pockets in the North but children can still get on the housing ladder, just in lower socio economic areas, there is a price to pay for it, no evening entertainment, no public transport to speak of, no bus/tube every five minutes, no top of the league schools nearby. The majority of twenty and thirty somethings I know are on the housing ladder on typical earnings with no parental help. A couple did have to live with parents for three years to save to up a deposit.
November 27, 2022
So many enjoying a top hat scheme, an occupational pension scheme where membership is restricted to certain employees only.
November 27, 2022
Pension funds have been hammered by the low interest rates that have prevailed for a sustained period. Were historically more normal interest rates to prevail again, the position of most would be greatly eased. (Recall not only would they see investment income rise but the present value of their future liabilities would reduce.)
November 29, 2022
People complain that the young have suffered at the hands of older people, but they never consider that for the young to enjoy less than 2% mortgages meant that people relying on private sector pensions paid the price with low pension returns and low savings returns. Pension companies last year were quoting an annual pension at 65 for a none smoker with a ÂŁ100,000 would give a pension income of ÂŁ4,500pa (with partial spousal transfer on death).
November 27, 2022
+1
November 27, 2022
‘Why are the pension funds over committed to bonds?’
It’s not to meet the unrealistic growth targets of ‘government pensions’ as you say.âIt’s to make up for the lack of yield on safe investments due to long-term low interest rates.âAnd the rates are low because the Government couldn’t afford to service its debt for long should rates return to a long-term norm of say 6%.âZombie companies result, tying up useful capital and assets with being productive.âLooked at as companies, there are many zombie countries too.
We seem to be in a place when the fiat money is kaput, not just in the UK but many other countries, and it’s just going to take time for the Ponzi scheme of printing more money to cover the problems caused by the last printing to tumble down.âA lack of loo rolls on the shelves will then be the least of our worries.
November 27, 2022
I thought that the key point is the UK pension funds are mandated to hold much of their assets in the form of gilts. Would I? No.
November 27, 2022
This private investor has tended to stay clear of the bond market but, seeing the price of some commercial bond ETFs, bottoming-out, took a modest punt a month or two ago. Since then, the price, like that of gilt ETFs, has gone up and I think that they’re a good short/medium-term prospect. I wouldn’t be surprised if central banks stop raising interest rates within six months – leaving me with a capital return just about big enough to have equalled the high inflation that they are partially responsible for having caused. Would I buy gilts? No, the return available on notice cash-accounts is quite good. Would I buy premium bonds? No – too low a prize fund rate. I won’t lend to a government that has spent borrowed money like crazy, on questionable projects.
P.S. I’m seeing some gossip that foreign aid will be cut again. Good.
Reply This site does not offer or endorse investment advice. I take these as personal comments.
November 27, 2022
I sold my Corporate Bond ETFs last year and was very happy to have done so. With yields at about 2.5% I’m still not in a rush to jump back in though SW. Lot’s of value in FTSE when compared to NASDAQ growth stocks but Cash is probably still King, even with high inflation eating away at it. Just my personal feeling about things of course!
November 27, 2022
Is not the answer and realities to the whole mess we find ourselves in that for decades politicians, civil and public services have never addressed the waste that hemorrhages constantly out of every sector of government?
Slashing or eradicating waste equates to less money having to be borrowed.
Cannot keep having what we can’t afford, the price we all end up paying is too high.
November 27, 2022
We don’t get value for money, either. Vast amounts of money keep getting poured in but the service provided gets worse! When are people going to get back to work? Furlough has done more damage then help. People now won’t go back to work, and why would they when they have been taught (by the government) they are better off and have a better lifestyle ‘working’ from home, even if they do less work (any work?) It is very rare for a public employee to get sacked, even if they are the laziest and most unsuitable sod on the planet, perhaps taking 6 months sick per year and totally incompetent to boot. It happens in large national industries too, where full sick pay is given. We all know the ones who use up their years entitlement every year/
November 27, 2022
Very true Shirley. I worked in the civil service albeit for only 6 years but I was amazed at the number of sick days some staff had. I also found in my office the more work and more efficient you were the less likely you woukd get promoted. Hence why I left for a better position.
November 27, 2022
Shirley
Oh so True !
November 27, 2022
Whatever happened to the halcyon days when Bank Managers managed and would not lend money with out cast iron securities and proper investigation and proof of ability to pay?
With our lot it is not a problem it is not their money.
November 27, 2022
turboterrier,
The days when building societies were mutual societies and would only lend three times salary for a house purchase and a substantial deposit would also be required.
Building societies became banks and mortgages evolved from standard repayment mortgages to more risky offerings that promised big savings.
The days when some went around joining every building society they could, in the hope of a payout when they demutualised.
November 27, 2022
Britannia sold out and the long standing savers didnât get a penny for the sell-out just completely floored returns from then on from their savings.
November 27, 2022
a-t,
Many mutual societies got wise to new investors seeking payouts. They often required an early membership date to deny eligibility to âcarpet baggersâ on demutualisation.
November 27, 2022
I accept new investors seeking payouts could have been a problem and should have been stopped.
But the Britannia merged with the Co-op and stiffed all its long-term investors, they got no payouts when other building society customers did. It was very frustrating at the time. The savers paid the cost.
November 27, 2022
Turbo
..”Bank Managers…”
They went as you know decades ago, only to be replaced by computers at regional and head offices, that work on a fixed inflexible programme, with absolutely no knowledge of the local situation.
They are now closing the over the counter service’s in many Branches, as so called customer service reaches an all time low with machine only transactions.
The so called telephone help service is of little help at all, even if you can get through to somebody after a long wait.
November 27, 2022
It is very evident now in Wokingham, use machines, deny cash provision after 2.30, close branches.
November 27, 2022
Indeed, one of the Big four located in the Market Square is closed all day on Wednesday, thoughts are they they will eventually only do over the Counter transactions in the not too distant future with commercial traders!
November 27, 2022
One of the Big 4 closes in February.
November 27, 2022
Javelin,
Your comment omits to explain that the credit agencies were pressured into maintaining AAA ratings for many institutions known to be in danger and which eventually went under – Bear Stearns, Lehman Brothers etc.
After it all hit the fan, the people at the top walked away unscathed and with their wealth intact.
Many financial institutions were advising clients to do one thing while doing the complete opposite themselves.
November 27, 2022
WHY did they suddenly want higher interest rates though?
Theyâd kept them at unnaturally low rates for so long (and been IMF instructed to do so).
Very odd change of policy that could only crash everything surely?
Lend beyond any sanity and then suddenly bankrupt borrowers?
November 27, 2022
Yes, Cuibono, for fifty years the average interest rate had been 7.5%, how did this interest suddenly fall after 2008 to under 1%, everyone was expecting it to go up after the RBS, Northern Rock collapse. People went from borrowing 2.5 x a couples wage, to 4 x each personâs (8 x a couples wage).
There was talk a couple of years ago about 0% interest rates and savers paying banks to hold money safely? Is this what they call the magic money tree? Pay savers 0.25% and loan out x 4. Itâs suddenly losing its magic, why? If they could do it in 2008, why does it have to stop now?
November 27, 2022
+1
November 27, 2022
They didn’t want to hike but the Bond Markets had finally had enough. The small shop owners had finally realised that their posh customers were probably bankrupt and not able to pay their bills. So they’ve cut back on credit and want payment for the higher risk. Don’t expect previous attitudes to return either. Internationally, everyone can see that the Emperor has no clothes (even if we can’t see that ourselves yet). We are going to have to come to terms with lower credit ratings (and therefore higher interest rates) as the new normal going forward.
November 27, 2022
+1
November 27, 2022
‘The government needs to borrow money for spending in excess of tax revenues’.
So, put simply if Governments controlled Spending and did not allow PMs and Chancellors to throw money about like confetti at a wedding, it ought to be possible to live within taxation means.
Of course that assumes Budgets are relatively fixed on Departments who must NOT overspend – often in reaction to media/opposition criticism.
It is this point of control that historically voters saw Conservatives as a safe pair of hands, as opposed to Labour who spent like just keep the printing presses rolling.
My how times have changed!
November 27, 2022
In simple terms, if you import 1 million people every year, mostly on minimum wages, tax payers become liable for the âŹ250,000 (EU figures) of housing, health, education costs over their lifetime. This is Tory policy. Fact. Wonder why your taxes are rising? Vote Tory for more Consocialism.
November 27, 2022
How do you think Labour, SNP, Liberals are going to stop it Timaction?
By going on their knees to the Eu perhaps? Please sir, can you stop the French giving people boats and weâll pay you oodles of money.
November 27, 2022
Thank you, Sir John, for this very clear explanation which I as a reader with no economics background very much needed. It leaves me thinking that the BoE was trying to follow the Fed’s strategy of raising interest rates, without having the financial strength of the US as the world’s reserve currency to fall back on, to protect against negative consequences. It was not acting as a national bank responding to the particular circumstances this nation finds itself in, unlike the national banks of Japan and China. It sound to me like it needs a redesign.
November 27, 2022
Off topic, it could be concluded from the first chart in this Sunday Times article:
https://www.thetimes.co.uk/article/4ae8926c-6cfe-11ed-a782-0f22726b9287?shareToken=2e771c622afd6aa4cbfc76ddb6bf785c
that Brexit on January 31 2020 sparked recovery of our exports from the crash caused by the pandemic.
But that is not how the euromaniac author interprets that chart; he has the equally daft idea that leaving the EU has led to our exports still being below pre-pandemic levels and we need to get back into a closer relationship.
For myself, I see our exports crashing by 22% with the onset of the pandemic and since recovering at about the previous growth rate, and therefore it taking maybe five more years to get back to the pre-pandemic level.
November 27, 2022
Of course to have competitive exports we need cheap reliable energy, far smaller government, deregulate (as we now can with post Brexit), have quality immigration only, an NHS and public services that actually work, lower simpler taxes but alas Sunak/Hunt have completely the opposite agenda. Their agenda is a doom loop of tax to death, net zero, push the rich and hard working overseas, open door low or no paid immigration and encourage a benefits and barter economy.
I too (like Farage see his video) despise what the Tories have done and continue to do to this country.
November 27, 2022
Me too. If they want patriots to start hating the country they previously loved, then they are successful at something. They have ruined the UK. Most of it irreversible too. I will never forgive them and hope karma has its way with the lot of them!
November 27, 2022
patriots will never hate the country, but something akin to hate is building up for the MPs, Ministers, Judiciary, Civil Service, and Police.
All activity seems to go in favour of the minority, the protesters, the sloping shoulders idle benefit scroungers that get encouraged and supported by the foregoing.
The ordinary, honest, working, law-abiding community are starting to rebel vociferously, for now, against this one-way traffic. Perhaps a tipping point will be reached?
November 28, 2022
Check out Rudyard Kipling’s poem “The Beginnings” ….. when the English Began to Hate
That’s why they’re polling in the low 20s.
November 27, 2022
Just to point out that the crash caused by the Chinese lockdown occurred in February 2020, about a month later than your date, Denis. But you’re right about the Euromaniacs as a general point.
November 27, 2022
I think they are quarterly data points. The point around the end of 2019 was still within the previous range of variability, by the next quarterly point it had plunged dramatically. The UK left the EU between the two.
November 27, 2022
There’s not the slightest doubt that our exports to the EU of e.g. manufactures and food products have declined since 2018-9. Nor that, unlike our competitors, we haven’t fully recovered from the big drop in exports generally in 2020 caused by lockdown restrictions on trade. This surely has to be seen as due to a special factor arising in our case, not in theirs. And if it isn’t Brexit, what is it?
I think the political leadership were at fault for not recognising that, far from being plain sailing, Brexit would result in reams of red tape for British exporters (and importers), designed to punish us for daring to leave, and deter anyone els that thought of doing so.
This should have been foreseen. The government claims to help businesses to export, but its website merely tells them what the red tape is, and what they have to do to comply:
https://www.gov.uk/government/collections/trade-with-the-uk-as-a-business-based-in-the-eu
If the government were serious in its commitment to British business, it would have created an agency that actually did for exporters the red tape work Brexit imposed on them!
November 27, 2022
Brexit may well have had some additional, marginal, effect, and likewise the war in Ukraine, but to a first approximation this is a pandemic crash and a gradual post-pandemic recovery.
November 27, 2022
Phillip, did our imports from the EU in manufacturers and food products decline by a similar % as people have had to cut back on their expenditure because of lockdown losses?
I agree with you that the UK government should facilitate a free exports agency for two years to assist with transition and increase exports.
November 27, 2022
Reply to A-tracy’s question: Expenditure cutbacks in Britain probably isn’t the reason for the decline as you suggest. I don’t have detailed figures, but In 2021 UK goods imported from the EU were down almost 17% compared with 2018, whereas imports from the rest of the world increased by almost 13%. So after the 2020 lockdowns, we could afford to increase imports from non-EU countries significantly. Perhaps with countries outside the EU, red tape wasn’t so much of a problem! Unfortunately, our exports to non-EU countries didn’t show the same strong recovery in 2021. They were still below 2018-19 levels:
https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/uktradeingoodsyearinreview/2021
Yes, Brexit has affected trade, but there are many countries beyond the EU that will trade with us with a cooperative mindset. The government must do all it can to support UK businesses trading internationally, especially exporters.
November 28, 2022
Phillip, wasn’t the EU imports drop % because imports didn’t have to come through the Rotterdam/EU first? https://www.escoe.ac.uk/projects/the-rotterdam-antwerp-effect-in-the-context-of-uk-trade-statistics/
Guardian 21 Oct 2022 â According to the latest figures, food store sales fell 1.8% as increasingly budget-conscious consumers cut spending.
Charged Retail – 23 Aug 2022 â Online grocery sales fell by 8.7% in to the four weeks ended 13 August,
FarmersJournal- 6 Jul 2022 â Both the quarterly and yearly figures show an overall decline of beef purchased by 10.5%
November 28, 2022
Wragg
Truss brought herself down she needed no help to achieve it
November 27, 2022
Most helpful many thanks.
So the Truss/Kwarteng growth strategy was broadly correct but ill timed, lacking adequate accurate debt forecasting especially with regard to energy policy?
November 27, 2022
John Redwood has already said, I think, that the energy discounts should have been capped at the average bill level and the discounted rate stopped over that to manage the rebate.
November 27, 2022
A little caution would have been good, especially as they had enemies all around….but the sentiments were sound
November 27, 2022
If someone in the Bank of England knows how markets work they wouldn’t cause so many bungles.
November 27, 2022
The question of why spending cuts weren’t added to the mini-budget still remains. It was a sitting duck without these.
November 27, 2022
My understanding is that cuts were going to be announced a couple of weeks later. Truss and Kwarteng didn’t realise how fast the coup could be carried out. It will be interesting to read their memoirs later on (if we’re allowed to).
November 27, 2022
Useful post for me, thanks. I wish they would teach some of this in schools, instead of the woke nonsense and Climate change alarmism.
November 27, 2022
Many will have heard about James Bond, but not Government Bond! They should start with pocket money budgeting, and how mothers and fathers have to spread available income to last a week or month. Then move on to how everything is taxed. And finally what Governments do with the tax! Could be quite enlightening!
November 27, 2022
MT
A good idea but do you really think that our Socialist teachers of today would actually cover the topic properly.
My old Secondary School of very many decades ago used to cover compound interest rate calculations, hire purchase agreements and the like in our maths classes.
Efficiency and varying rates of productivity of a working day also came into the calculations, but then we had a knowledgable teacher who was preparing us for the world of work, as well as examinations.
I found the lessons incredibly interesting, enjoyable and relevant.
November 27, 2022
The world of work is of little interest, more and more ‘students’ will be interested in sciving between 16 and 18 and then how to avoid work but get benefits.
November 27, 2022
I believe the BoEâs own DB pension scheme was 100% invested in an LDI during this period. Bit of a conflict of interest ?
November 27, 2022
For 12 years john you have stated on your blog that the real debt is 1.7 trillion and not 2.5 trillion which is over 100% of GDP to which the treasury say is under 100% of GDP, but now you are saying that the gov debt is 2.5 trillion. Which is it.
Reply It was ÂŁ1.7 tn as they received the income on the bonds and paid nothing out to own them. The new issue is their wish to count banks reserves at Bank of England as state debt which is a debatable question
November 27, 2022
It might be happening north of the border but the announcement that the SNP are paying out ÂŁ1,5m for an Independence Team when cutting back on essential services just highlights the group think mentality of all our so called ” leading” politicians”. It is like a disease that must be eradicated.
November 27, 2022
Truth is the Government is not in control ; outside bodies influence in all manner of ways . The BofE should not be allowed the sort of mandate it has ; creativity and enterprise should not be stifled out and we must be in control of our own laws .
November 27, 2022
Bert,
As an American pointed out – and it happens in the U.K. too :-
âThis is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. Itâs a gangster state, running on gangster economics, and even prices canât be trusted anymore; there are hidden taxes in every buck you pay. And maybe we canât stop it, but we should at least know where itâs all going.â
November 27, 2022
Forget about the sale of bonds or the rate of interest. These are like re-arranging the chairs on the Titanic.
We are under attack by the twin Marxist cults of diversity/mass immigration, causing social, institutional and infrastructure breakdown, and the economy destroying Net Zero Strategy based upon the science denying fraudulent climate models that use dry air and the incorrect use of the feedback mechanism, whilst ignoring the properties of gases and other climate influencers. At the same time curbing plant food (atmospheric CO2) and fertiliser production to cause famines.
This is all driven by our educational establishment, state broadcaster, existing political parties, civil service and Parliament all following an agenda set by the UN et al and we need a complete re-set, starting at the next GE, to avoid a complete breakdown of our economy, sovereign national identity and civilisation.
November 27, 2022
What do you mean âthat use dry air and the incorrect use of the feedback mechanismâ and âignoring the properties of gases and other climate influencersâ?
Give references otherwise nobody can check whether you might be right or wrong.
What should be a correct âuse of the feedback mechanismâ? Is there only one such feedback mechanism?
What âproperties of gasesâ (and of which gases in particular) are ignored? What âother climate influencersâ are ignored?
As you seem to be keen on writing such things, you must know the answers to all these basic questions?
Please tell us everything about how âdry airâ, âfeedback mechanismâ, âproperties of gasesâ are improperly handled in climate models.
November 29, 2022
So, as usual, no follow-up from OR.
So just a very simple question then: how does a (climate or weather forecast) model produce evaporation over ocean and land surfaces, how does this evaporated water vapour produce clouds, how do those clouds produce precipitation of rain and snow, if, as you say, these models use âdry airâ?
I would love to hear your explanations about these various processes that all seem to involve âmoist airâ. If you donât answer, could it be that you did not understand what you read about these models?
November 27, 2022
Most were able to see there was anti Government Briefing going on in September. It was also obvious it was the unelected unaccountable establishment with their WEF ideals that were manipulating our elected representatives.
This of course is still persisting today, if the Government is obedient and submits to the orders of the unelected unrepresentative BLOB they are left alone. What successive Governments have failed to recognise they were elected to take charge, do the biding and ensure the safety and security of those that elected them, they themselves are not servants of the machine.
Governments need to recognise they are in charge, they under no circumstances can blame others. Parliament needs to ensure that’s how the Country is run.
The Government and Parliament need to get back control of the Country, after-all it is the only purpose of their existence.
November 27, 2022
Do they really understand what they are doing?
Should any of these financial geniuses that determine the rates in the BoE really be left alone to play with real money, our money?
November 27, 2022
Why does the Bank need to drive bond prices down to raise interest rates, why don’t they just raise the base rate?
Reply Raising Base rate does directly lead to lower short dated bond prices. The Bank also wanted to increase interest rates for longer term contracts like mortgages so needed to drive longer dated bond prices down to signal higher rates for longer term loans.
November 28, 2022
Thanks for you reply.
November 27, 2022
Having finished my sunday paper, I’m pleased to have seen reporting of some improvement in the performance by this government. I get the impression that Sunak has been listening to some of his very frightened MPs – and that they’ve been paying attention to the tone of many comments here and over at Guido.
November 27, 2022
My impression is that Sunak – and Hunt too – look at a global picture with regard to their political and financial prospects and if they are out of office in a couple of years so be it. He may have to appear concerned in the media.
Other reports are of current MPs standing down at the next election.
Politics has changed over the decades. Many will look at Tony Blair, or even Nick Clegg, as a template.
November 27, 2022
Is there a case for making the BoE more under Government control and less independent?
November 27, 2022
Thank you for enlightenment. I take exception to, “Government needs to borrow for spending in excess of tax revenue”. Acceptable in war and covid situations, but not as means of deceiving the tax paying public when they have already maxed out on open legal tax. Government needs to revert to Thatcherite Housewife principals of not spending what you do not have or are not entitled to. Bonds are a money tree forest in which chainsaws should be illegal.
November 27, 2022
+10
November 27, 2022
Sir John: is there a democratic way of removing this government? We badly need one. Can Parliament remove them, or they all ‘in it together’. I am not sure the UK will survive another two years of this deliberately destructive, dishonest and undemocratic government, which seems to put every country and every nationality ahead or our own!
November 27, 2022
Shirley
Iâve been wondering that too. As a country we donât âdoâ riot, we do things legally! But when the government doesnât listen, the likes of Jeremy Hunt are âinstalledâ and invisible hands are manipulating process off stage – there must be a way of a legal coup to rid us, of not just government, but half of parliament too.
An election, I suppose!
November 27, 2022
Now that is out into the open i would like to move on to QE and inflation.
Everywhere i go people tell me that QE was the cause inflation and i say how you know that, because the media and gov bank have told me that, which was disinformation. Since 2009 till 2019 it was impossible for QE to cause inflation, the money was never printed, it sat at the BoE in gov bonds like it does today, it was only when the gov told the treasury to give the BoE more bonds in 2020 and to give the credit to high street banks to give to businesses and people by credits to their bank accounts which is printed money credits for them to spend, the inflation was caused by the people themselves sitting house on their computers buying up everything under the sun, shipping containers went from 6000 dollars to 20,000 dollars because of PPE, factories were closed or half shut, which caused more inflation, commodities went through the roof because the sudden demand, more inflation, net zero policy,, more inflation and war, more inflation. Would you say what i write john is what happen. It was the people themseleves that cause the inflation.
November 27, 2022
Paul
Correct
The commercial banks became money printers and created more debt than there are $s and ÂŁs.
November 27, 2022
of course the gov must share some blame, they didn’t what they were doing and panicked like they always do.
November 27, 2022
The government borrows money by selling gilts to financial institutions. Can the government borrow directly from the BoE?
November 27, 2022
Reform is a great name for a party, but I wouldn’t vote for them.
I read once that “the plan ” is to destroy the old institutions.
BBC, both Houses of Parliament, Monarchy, Civil Service, MOD etc.
Surely it’s better to massively Reform them.
Look how wrong was the perception of the public’s feelings about the monarchy.
November 27, 2022
The warehouses are full with very expensive goods with people cutting back on spending, sales sales sales and more sales, you can see where i am going with this, factories are idling and starting to cut hours worked all over the world and some are shutting and money rates will go down at first before starting to climb, more pain. As for Brexit, waste of time now, who going have money to buy in volume, Germany, France, USA, no same boat. What you need is a first class money person to get you out of this one, none in houses of parliament or in business world in this country, clueless the lot of them, all the education you could have, and all clueless. Still the King will be happy because he hates waste.
November 27, 2022
May I comment on another topic of importance last week which showed how pathetic most politicians are.
A second Scottish Independence Referendum was blocked. The S.N.P.claimed that meant (disregarding the fact that this generation had already voted) the U.K. is not now a voluntary Union. They made that sound credible because at Prime Minister’s Question Time Sunak and Theresa May had weakly argued that the SNP (which was founded primarily to get an independent Scotland) should stop trying to get independence and settle for governing Scotland well. Sunak and May neglected to point out what the SNP really want is a ‘Neverendum’ rather than a Referendum until they win a Referendum. If they lose a second vote they will practically immediately demand a third vote – what is the argument that separates the case for a second vote from the case for a third vote?
Actually the SNP is being very stupid in asking for independence to join the E.U. That would mean changing their currency twice (from the pound to a Scottish currency and then to the Euro), risking being stopped by Spain, Hungary or whoever, paying money into the E.U. instead of receiving it from England and starting a trading, customs and immigration border with England even worse than is continuing unresolved in Northern Ireland. Most Scottish people aren’t that stupid. If the next General Election in Scotland is on independence on those terms rather than on the economy the SNP will be badly beaten to the great advantage of Labour and to a small extent of Conservatives.
If the SNP had any sense (which they don’t) they would adjust to changed circumstances and campaign for a truly independent Scotland and not to rejoin the E.U.
November 27, 2022
Where does crypto currency fit into the picture?
November 27, 2022
As regards that at present in issue, nowhere at all. As for government-minted crypto in future, it would not be so much distinguished to the forms of currency now in issue by governments as to make any difference to debt management.
Recall the private issue crypto currencies now extant possess two characteristics that enthusiasts find attractive, being isolated from government control and providing anonymity. The enthusiasts are thus joined by the money laundering classes and by the fraudsters. Add the ability typically of those in control of a crypto currency to create as much as they want (q.v. FTX), and it becomes clear why Warren Buffet would not give as much as $25 for all the crypto in the world.
November 28, 2022
turned out to be the exact opposite of secure which is what was attractive, and gathered in investors into a sort of ponzi scheme. Value increased as long as new buyers came along.
November 27, 2022
Are on line banks more likely to take customers money when paying a bill and find a reason not to process it into the invoice issuers account.?
November 27, 2022
It is doubtful since online or offline, the banks use the same transmission mechanisms typically for moving customers’ money between themselves for onward lodgement in the destination accounts.
November 27, 2022
We’re only getting half truth on immigration.
There were well over 1 million immigrants this year. 500,000 talented British left in the same period.
We are exchanging brains and wealth for dross.
There is a mass refusal to pay public sector pensions already voted against with feet.
December 5, 2022
NLA, â500,000 talented British leftâ, it is certainly true that a good deal of them were young(ish) people wanting to try their chance in another part of the world.
Another group might not be so talented but certainly as clever as the first group, the recently retired deciding to spend their latter years in countries with a bit more sun, a somewhat better food, a possibly less expensive cost of living, and likely less acrimony than in âOld Blightyâ.
November 28, 2022
[…] A guide to the way the Bank controls the bond market and interest rates â John Redwood […]