To push the market interest rate on government bonds upwards, investors have to push the price of those bonds down. And there is only one way they can do that: they have to sell government bonds. Full stop.
But to have a significant effect, they have to sell enough of them. And, crucially, having sold them, they cannot then buy them back without reversing the very pressure they are supposedly trying to create.
They can, in fact, just stop buying them. Issuance of new to cover this year’s deficit is what, £100 billion? Another £200 billion matures each year and must be rolled over? About that?
£300 billion has to be sold each year, perhaps 10% of total ossuance. If people just stopped buying these new – a buyers’ strike – then that would push the price of gilts down. Pretty substantially too I’d say – but am not going to try to prove. So, Spud is, again, wrong….
Or even just low bid that new issuance ?
The limited knowledge of government debt auctions I have is not US based , that said I roughly understand it as an auction process that works down the bids highest first until the volume is satisfied, and the bid price of that satisfying bid becomes the price for the auction, everyone bidding that or above gets that “lowest satisfying” price.
If so, they don’t even need to stop buying, just bid lower. And if enough do so to move the new issuance price, that surely also impacts the “price” in the second-hand market? Though I would have assumed it’s the new issue price government would be concerned about…
Someone will end up holding the newly issued gilts, but the potential buyers’ enthusiasm or otherwise will determine what coupon (= yield) the government will have to offer to get Mr Someone involved.
This in turn will determine the yield (= price) at which similar old gilts trade.
In practice, I believe they set the coupon at a “round number” value like 3¾% or 4⅛% – the premium or discount get it to the market-clearing rate of 3.78856% or whatever it is on the auction.
Well he can try it with his money. I’m sure the markets will spin on their axis when the 75p hits.
The use of the words ‘Full stop’ following a full stop is nearly always a sign that the writer is wrong or, at the very least, too arrogant to think or read about the subject sufficiently.
See also ‘End of’, ‘Simples’ and ‘It’s a no-brainer’.
See also “settled science” or “legally binding”.
Does he actually understand how any of this works in the real world?
The government needs to borrow more money, so it comes to the market with more bonds to sell. Investors look at the amount of debt being issued, the economic outlook, inflation, government finances, the risks and the returns available elsewhere and say, “At the current yield, we don’t think that’s attractive enough.” So the government has to issue the new debt at a higher yield to attract buyers.
That higher yield then feeds through into the pricing of existing bonds because nobody is going to pay the same price for an old, lower-yielding bond when newly issued bonds are offering a better return. Their prices therefore fall until their yields are competitive.
So yes, selling existing bonds can push their prices down and yields up. But the idea that this requires investors to deliberately sell “enough” bonds to manufacture higher rates, and then somehow refrain from buying them again, is complete nonsense.
Bond yields are determined by supply and demand and expectations across both the primary and secondary markets. The government doesn’t need investors to mount some coordinated bond-selling operation to make its borrowing costs rise.
Or does it work differently in Spud World?
Everything works differently in Spud World.
No.
I’m guessing the CCP , central and local, holds over £150bn of UK gilts. Foreign currency reserves in sterling are also a type of gilt imv except that they don’t pay interest and there’s no term date but they can be sold. So what would happen if the CCP decided to sell it all tomorrow, it would surely move both bond values and the currency downwards at the same time. Could be a plot in a spy movie one day with Louise Haigh as Jonny English making frantic phone calls to the villains.
I’m not sure you’re not doing the same as Spud there. All the players are individuals making individual decisions. There’s no cooperation. And markets are forward looking. So everyone’s trying to anticipate the revealed opinions of others.
So no one’s trying to create pressure. In the same way as there’s no such thing as a buyer’s strike..
All the players are individuals making individual decisions
How independent is their decision making in reality, though? They all have the same goal, to be repaid, they have a similar mind set that attracts them to the industry, nobody really likes to be the odd one so there will be here mentality in response to public information.
Obviously their decision making won’t be 100% correlated but it won’t be 0% either.
Their decisions will be highly correlated just as the results of throwing a loaded dice are – even though the throws are independent.
There is no need for a conspiracy – a few hundred rational human beings [N.B. the irrational ones have all gone bankrupt long ago] are faced with a government that wants to borrow money and they each sit down and do their sums; they may have somewhat different expectations for the pattern of budget deficits and inflation over the term of the bond but the yield on existing gilts or US Treasuries or German government debt are the same for all of them and the laws of arithmetic don’t change so the prices that they think are acceptable will be pretty similar
The “irrational” ones can be the ones who beat the market.
They may have beaten the market once when they struck lucky but no-one has ever struck lucky every time.
You do have a good point there, BiND. All of the investment analysts will have the same university education & have thus have similar opinions. So yes, herd behaviour.
Worth noting that government’s economic advisers also had the same education. The other thing they’ll have in common is no personal experience of operating a business.
There’s an interesting congruence between the proliferation of “experts” & the decline of the UK economy.
NO – once again you show that you do not know what you are talking about. Extrapolating from P&B’s one investment analyst to say “all investment analysts are the same” is ridiculous. To say that a government advisor who read PPE will have the same opinion as someone who read Maths or Medicine or Biochemistry or History or Engineering or Astrophysics, or left school at 18, is blatant nonsense (and I did meet a few who had personal experience of operating a business).
Always on the defensive John.
Clever way of ducking admitting that you are wrong and have been talking nonsense due to your inferiority complex.
What is there to gain from my going on the offensive and throwing out gratuitous insults?
Do you seriously believe government (& the BoE) does not employ mathematicians & statisticians & only employs PPE’s?
Who else employs PPEs? A tiny proportion of mathematicians join the government.
I haven’t the vaguest. What government doesn’t seem to employ is anyone with successful experience of doing anything useful.
Anyone using the “full stop” nonsense is not to be taken seriously.
Ah, so that’s why I failed my driving test.
“When I tap on the dashboard I want you to come to a full stop.”
I would tend to use “period” rather than “full stop”. As in “unplug these two key cables and no one is accessing the system, period”.
Of course that has its own issues.
We need to have a discussion on women’s full stop poverty.
He doesn’t do logic does he?
To push the market interest rate on government bonds upwards, investors have to push the price of those bonds down. And there is only one way they can do that: they have to sell government bonds.
If they’re not holding the bonds, they can’t benefit from the increased yield, can they?
Again, remember markets are future looking opinions. It’s the opinions that change. It doesn’t take the sale of a single £’s worth of bonds.
supply and demand. he just can’t see both terms in the equation.