The Telegraph reports:
Banks bought 91pc of the £39.8bn of net issuance of new gilts with purchases totalling £36.1bn, compared to the £11.4bn of UK debt bought in the preceding six months.
The scale of the buying of UK Government debt was revealed in figures published on Wednesday by the Bank of England, which show the increased dependency of the gilt market purchases by the country’s major banks.
Shocking. Sounds a lot like monetization of the debt!
(Hat tip to Sean Corrigan)
This is the Central Bank carry trade. The Central Bank monetizes the banks’ worthless derivative book and various non-performing “assets”, at close to zero percent interest or free(we don’t know for sure because the Central Bank’s books are not open to our scrutiny), the banks take that money and put them into Govt bonds and pocket the rate difference, and upgrade the quality of their books. Why should the banks loan to risky business in this credit collapse , when they can do this risk-free carry trade ? Risk free until the sovereign defaults. This is one way the central bank manages suppress the long end of the yield curve, other ways involve securitizing(insuring) the bonds via derivatives. Pure Ponzi that is going to end very badly.
The UK gilt rate is not low’ish due to any fundamental soundness of the economy, on the contrary, is it low because it is rigged.
Well, it depends on the central bank’s policy doesn’t it. In the UK the banks are limited by a reserve requirement. That means the central bank control the maximum amount of debt that can be monetized. Without these bonds the banks would monetize other debt.
As Gary points out, the interesting thing here isn’t the monetization, it’s that the bank’s positions have been made safer by the state at the cost of the taxpayer.
I think that the BoE have been keeping the supply of money too high for approx the last six months. Before that during the recession proper they had good reason for keeping it high. Since growth and inflation have returned they haven’t.
This monetization of debt could increase the supply further if the banks run down their excess reserves (and I expect they have done that to some extent). But, if they’re keeping to their stated policies then the BoE should compensate for that by changing the quantity of reserves.
There’s a certain irony here. Once again, in the press, there has been a certain amount of moaning from government officials and others about the lack of lending to individuals and small businesses. Yet bank lending to the Gov’t is apparently increasing.
Crowding out, anyone?
Interesting to note that whilst, on the face of it, UK reserves of around £25 billion cover two years of payments deficits and look quite healthy, a goodly proportion of those reserves will be represented by foreign holders and purchasers of Gilts.
Whilst £25 billion looks good against a £12 billion annual deficit on payments it does not look so good against £39.8 billion of gilts when 91 percent has been purchased by the (UK?) banks.
Maybe those scoffing at the mearest mention of re-introduction of UK exchange controls should not be indulging in such merriment just yet. Unintended consequences and all that.
“Banks bought 91pc of the £39.8bn of net issuance of new gilts with purchases totalling £36.1bn, compared to the £11.4bn of UK debt bought in the preceding six months.”
As so often a story in the Daily Telegraph which shows little understanding of financial markets.
This could mean something or it could mean nothing.
Let’s consider:
a) Banks buy and sell gilts all the time maybe they where short the issue.
b) Most international investors do not buy directly so maybe these issues attracted more international demand so bank where just intermediaries.
c) Banks prefer short term gilts and institutional investors long term so has the maturity mix changed.
d) Regulators are pushing banks to hold more gilts so maybe this was the reason.
Unfortunately, it appears the BOE no longer publishes UK bank holdings of gilts only total financial institutions. With out that this may mean nothing