From the FT this lunchtime:
Demand may improve if gilt yields approach 5 per cent. And traditional buyers — such as pension funds, banks and insurers — are expected to remain loyal to the market. “There will be gilt buyers at the right levels,” Gartside added. “To my mind, 5 per cent is a pretty good return. The current level of 3.9 per cent is low given that inflation is 2.9 per cent.”
Pension funds, in particular, are keen to see gilt yields rise as the QE programme has increased their liabilities. “We hope that the suspension of QE will raise yields, and so reduce scheme deficits,” said Joanne Segars, chief executive of the National Association of Pension Funds. “We want the government to play its part in supporting pension funds and help stem the tide of scheme closures by issuing more long-dated and index-linked gilts. This will help bring the stability that schemes need.”
Ignore all the nay-sayers, all the brokers, all the wide boys and all Conservative politicians: here’s the real opinion worth having on government debt. Relax the interest rate a little — or drop the AAA status (the effect is the same in broad terms as the increase in risk is reflected in an increased interest rate) and you’ll please the biggest market for UK government gilts (that’s debt in plain terms) - the UK pension fund market.
Put it another way: the demand for UK government debt is real, strong and will be continuing because UK government debt is the one savings product the increasing number of baby-boomer pensioners can rely upon to pay them into old age.
Which proves just how wrong George Osborne and all his sycophants in the right wing media are. The reality is UK government borrowing is good news for our pension sector. The simple message is we can spend our way out of recession — as we need to, and benefit in the long run. Hoe about that for a double whammy (oh, and we can afford the extra interest too‚Ķ.)
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You are trying to pretend that there is a free lunch available here. There isn’t.
If Government borrowing costs increase due to the ending of QE or the loss of the UK’s AAA rating then Government will have to spend more of its cash on servicing its debt and therefore less on services etc. Unless of course the gap is plugged by extra tax. Which would reduce consumer spending, investment etc which would in turn weaken the economy etc.
It is bizarre (and completely incorrect) to suggest that it is somehow a blessing for the interest on a Government’s debt to be high.
Vernon
Please deal with the issues
Please note the NAPF might have more authority with you
And please note they’re talking 1%
The UK can easily afford the relatively insignificant cost of that (a few billion at most) when it will protect 2 million jobs
Or are you in the business of promoting unemployment?
Richard
I don’t think you will find that the NAPF is suggesting that the UK should lose its AAA status somehow…. That really would be calamitous for pension defecits.
All the NAPF is doing is saying what savers of all descriptions have been saying for some time – that the this Government has stiffed them. In this case the NAPF have been stiffed by the Government using QE to artificially keep gilts yields down at a time when CPI inflation is way above the Bank of England’s target.
Anyway, how exactly does this protect 2 million jobs? You are guilty here of exactly what Paul Krugman accues people of in one of your other posts – stating something as it were a fact when it is nothing of the kind.
Read the links in my blogs
And of course they’re not asking to lose AAA – but they’re not saying there’s either a crisis or a reason for doing so either
Your acse is, in other words, utterly groundless
“Relax the interest rate a little — or drop the AAA status (the effect is the same in broad terms as the increase in risk is reflected in an increased interest rate) and you’ll please the biggest market for UK government gilts (that’s debt in plain terms) – the UK pension fund market.” The NAPF may not be asking for the demise of AAA but it seems you are Mr Murphy?
Richard,
There a couple of issues worth highlighting:
1. The increase in interest rates may not appear to be much at 1%, but it is actually massive. 10-year rates are currently at c. 4%, and so would have to increase by 25%.
2. More importantly, UK pension funds simply do not have capacity to absorb the supply of gilts. The UK’s long-term gross savings ratio is around 4%-5%, or about £40 billion annually. Even if savings shoot up (as is likely) during the recession to c. 10%-12%, this only adds up to c. £100 billion, and clearly not all of this will be collected by pension funds (some will go towards paying down mortgage or credit card debts, or will be invested directly in savings products or the equity market).
This means that even if pension funds were to invest all their receipts in gilts (which of course will not happen), they would never make up even half of the current net borrowing requirements.
The shortfall will have to come from non-domestic sources.
eg
@Petrified Peter
Actually I’m not
But I am saying it is a way of delivering what the NAPF want
@Edouard (London Expat)
Stop the carp
1% is 24% of 4%. It’s still 1%. Stop playing with nonsense
base rate were 5% or more not that long ago
And of course the UK may not buy all the gilts
We buy other people’s too
As they buy ours because they’re an excellent investment
If you did not believe that, why are you here?
I don’t think losing the AAA status would do anything other than force lots of pensions funds to have to dump their stocks of gilts because their investment criteria require them to invest set percentages of their funds in AAA rated securities.
Easy Ricky!
If interest rates are 4% today and increase to 5%, that is an increase of 25%. It is basic maths! (5/4= 1.25).
Not need for an outburst for that.
eg
Lies, damned lies and statistics
That’s what I was saying
@Petrified Peter
And as I’ve noted – I did not advocate this
I said there is no reason to – as the market for UK debt is buoyant and might be even stronger still if at some time – as will inevitably happen when base rates are 0.5%, rates rise
Except you’d rather not follow a logical argument
You have got this the wrong way round. The pension funds say they might buy more if yields rise (i.e. prices drop), but they aren’t expressing a view on issuance. It might take several hundred billion of new issuance to raise yields to a level where the pension funds become buyers.
@Alex
Well that’s good news then
We can issue hundreds of billions of bonds without problem before yields need rise
And when they do there will be no buyers waiting in the wings
Glad you agree all is, therefore, completely under control
Richard,
Even if the government finds willing buyers (including domestic pension funds) for its gilts at 5%, this will cause many problems.
To start with, the rise in yields will not only affect the cost of funding the current gross borrowing requirements, but will also force a re-pricing of the entire outstanding stock of gilts.
Assuming that (i) the average time maturity of outstanding gilts is 10-15 years, and that (ii) yields increase from 4% to 5%, means that prices on outstanding gilts will have to fall by around 7% to 10%. This equates to a loss of c. £50 billion for gilt investors (including the Bank of England), the effect of which will be similar to a tax.
But just as importantly, if pension funds buy more gilts, they will reduce purchases of other fixed-income securities. In the UK, this means fewer purchases of corporate and bank or other financials bonds. This will affect the ability of companies, large and small, to access funding, and will also affect banks’ ability to offer mortgage and consumer loans.
This is the classic “crowding out” effect of rising government borrowing.
The lucky few companies and consumers able to access financing will have to pay significantly more for the privilege. The most dramatic impact will be on mortgage rates, which could very quickly lead to carnage in the housing market.
eg
@Richard Murphy
“We can issue hundreds of billions of bonds without problem before yields need rise”
I don’t see how you get to that position. Pension funds say they will buy more gilts if rates rise, but they aren’t saying they will buy incrementally if rates move up a tad.
I am sure we would all buy gilts if they yielded 15% at today’s levels of indebtedness, but that doesn’t mean we would buy gilts at whatever level of indebtedness it took to get them up to that yield.
Anotherway of looking at what the pension funds are saying is that quantitative easing has driven gilt prices up[/yields down to levels where the pension funds are no longer interested.
@Alex
Why are they all so keen to buy them then? The FT records that there’s a ready market in its pages yesterday
You’re talking complete nonsense
@Edouard (London Expat)
You make the classic error that markets would use the money if it were available
They wouldn’t – we would have equilibrium at well below full employment
Now I’m sure you’d love that – a labour force in fear of the power of big business suits your agenda well I’m sure – but oddly enough the electorate don’t
Which is precisely why governments spend at times like this – no one else will
You really are reading the wrong books – it’s a problem of your youth. Some of us had a much more rounded education
Richard:
I am sure that the University of Southampton offered you a fine education.
Your reply made me curious.
Assume for a second that the pension funds do not buy all these gilts at 5%. What do you think they would do with their members’ contribution instead?
eg
Edouard
Ditch equities – obviously over-valued and wholly inappropriate for pension saving as they’re short term focussed for long term need
Demand the opportunity to invest in new green infrastructure bonds
Put their money into making jobs, building the economy and future we need when we’re all old
In a very very brief nutshell
Read the Green New Deal for more
Richard
Richard:
I am sorry if I was unclear. I did not ask what you think they SHOULD do.
I asked what you think they WOULD do in the case they did not buy gilts at 5%?
eg
@Edouard (London Expat)
All go home?
Play croquet?
I have no idea what you’re driving at – so why not tell me?
You guys are WAAAY behind.
In Greece, we’ve been playing out this same argument for years, and the debt junkies have been winning the argument every time.
Thanks to these extraordinary efforts, we’ve managed to mess up both our pension funds AND our government’s finances. Whereas you guys, with your puny debt/GDP ratio (though noted, you’re building it up nicely), are still dreaming of a world free of make-believe money. Seriously, UK, get with the programme!
Some details here: http://lolgreece.blogspot.com/2010/01/pension-provision-fail.html
Richard, the money IS available. Millions of people contribute monthly to their pension funds (I do).
So what are the funds doing with it if they are not investing it? They surely don’t put it under a mattress.
This is my question.
eg
@Edouard (London Expat)
They are buying gilts
They are selling bonds
They are buying property
They are churning
They are losing you and me money
So Richard, everything is fine. The money is available and it is invested. And this capital is used by banks to make mortgage loans and by companies to finance their business.
What is the problem?
They’re mismanaging it
Are you happy about that?
Is that what you want them to do?
Richard,
In what way are they mis-managing it? If you have evidence of mis-management, why don’t you or your friends in the trade unions business bring a case to the pension regulator?
I must admit that I find that my pension is perfectly well managed. I am paying a lot of attention to asset allocation and conduct my own due diligence around managers. It is not that difficult.
eg
@Ted B.
How very strange
Ted B and Edouard sign themselves in the same way
Now I wonder why?