Oh dear

March 25 (Bloomberg) — The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.

Gilts slumped after the London-based Debt Management Office, which manages bond auctions on behalf of the Treasury, said investors bid for 1.63 billion pounds of the 40-year securities. The last time the U.K. government was unable to attract enough investors was in 2002 when it tried to sell 30- year inflation-protected bonds.

An explanation for non-economics types.

Long term interest rates are set by the markets. It is only the short term base rate which is set by the government.

We might indeed want to have low interest rates at the moment in order to get out of this recession/depression thing.

We might also want to borrow lots of money to pay for all of these lovely spending plans and bailouts.

However, we might find that the two aims are in conflict. If we borrow lots and lots of money then interest rates will rise.

The worrying thing is, this might be the first sign of exactly that happening.

I don´t say that it is mind, a single auction doesn´t tell us much. But if this continues, interest rates will indeed rise and no, we won´t like that at all just at the moment.

9 comments on “Oh dear

  1. “But if this continues, interest rates will indeed rise and no, we won´t like that at all just at the moment.”

    JohnB won’t mind at all. You see, it’s merely nominal rates that are rising, not real ones.

  2. “so what happened in 2002?”

    IL gilts. Have to go back to 1995 to find a conventional gilt auction fail, and it’s never failed before with such low coverage.

  3. “The yield on the 4.25 percent gilt due 2049 rose one basis point to 4.6 percent today”

    From Bloomberg. Is that a misprint or are we really that close to the End of The World?

    Also Bob someome from ‘Liverpool Hope University’. Is that made up? He does say ‘cap in hand’ so I’m wondering if it’s a joke.

  4. Is anyone surprised that creating money caused its value to drop and the charges for renting it to rise, which they didn’t really do in real terms, because supply-demand laws are, to make small pun, inelastic?

    Money is just another commodity and it has its own demand curve. Increase the supply and the demand curve stays the same but intersects the changed supply curve at a different point.

    There is one necessary implication: Buy land, gold, good equities and borrow like a mad bastard to pay for them if you can get a fixed rate. Inflation is coming and interest rates are on the way up, up, up.

    Gordon Brown and Obama are idiots, or possibly self deluders or possibly thieves. It hardly matters.

  5. When a significant problem in the credit crunch spreading from banks into the rest of the economy is unavailability of credit to business it is sheer insanity for the governments of the UK and US to be in the credit markets offering state guaranteed returns and sucking up all the available capital. It might just be the saving of future generations that the markets shudder at allowing governments to load up with so much debt.

  6. Matthew, incorrect. The deficits were in part caused by the big tax cuts, which boosted the economy; the high deficits pushed up interest rates, boosting the value of the dollar against the likes of the yen, the-then deutschemark, etc. The big deficit was a destablising force in some ways. However, as a percentage of GDP, the Gipper’s deficit was way below what we have now.

    I miss Ronald Reagan.

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