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Update: Anarchy in the UK (Parliament...at least on the Tory side)


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The BoE intervened in the bond market again:

 

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WWW.CNBC.COM

"Dysfunction in this market, and the prospect of self-reinforcing 'fire sale' dynamics pose a material risk to UK financial stability," the bank warned.

 

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The Bank of England on Tuesday announced an expansion of its emergency bond-buying operation as it looks to restore order to the country’s chaotic bond market.

 

The central bank said it will widen its purchases of U.K. government bonds — known as gilts — to include index-linked gilts from Oct. 11 until Oct. 14. Index-linked gilts are bonds where payouts to bondholders are benchmarked in line with the U.K. retail price index.

 

The move marks the second expansion of the Bank’s extraordinary rescue package in as many days, after it increased the limit for its daily gilt purchases on Monday ahead of the planned end of the purchase scheme on Friday.

 

 

Needless to say, this is a bit of an understatement:

 

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Moves of this magnitude are highly unusual in developed world sovereign bond markets.

 

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  • Commissar SFLUFAN changed the title to Update: Bank of England intervenes in UK sovereign bond market again, issues another warning of "material risk" to UK financial stability
8 minutes ago, Commissar SFLUFAN said:

There is a non-zero risk of default if the cost of borrowing for the UK government continues to increase.

 

To further elaborate:

 

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WWW.THEGUARDIAN.COM

Yield on 10-year government bonds rises above 4.5% despite Bank of England trying to quell jitters

 

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UK government borrowing costs have risen to the highest levels since the financial market chaos triggered by Kwasi Kwarteng’s mini-budget in September, despite renewed efforts by the Bank of England to smooth over the turmoil.

 

The yield – or interest rate – on 10-year UK government bonds rose above 4.5% in afternoon trading on Monday, returning to the levels last seen two weeks ago, before the central bank intervened after the chancellor’s poorly received tax and spending statement.

 

The fresh rise in borrowing costs came despite an attempt by the Bank earlier on Monday to quell market jitters before the expiry of its emergency bond market intervention at the end of this week.

 

 

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Also, the initial intervention from the Bank of England was driven entirely by a rapidly-spreading contagion in pension funds with several pushed to the brink of collapse:

 

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EDITION.CNN.COM

Pension funds are designed to be dull. Their singular goal — earning enough money to make payouts to retirees — favors cool heads over brash risk takers.

 

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Pension funds are designed to be dull. Their singular goal — earning enough money to make payouts to retirees — favors cool heads over brash risk takers.

 

But as markets in the United Kingdom went haywire last week, hundreds of British pension fund managers found themselves at the center of a crisis that forced the Bank of England to step in to restore stability and avert a broader financial meltdown.

 

All it took was one big shock. Following finance minister Kwasi Kwarteng’s announcement on Friday, Sept. 23 of plans to ramp up borrowing to pay for tax cuts, investors dumped the pound and UK government bonds, sending yields on some of that debt soaring at the fastest rate on record.

 

The scale of the tumult put enormous pressure on many pension funds by upending an investing strategy that involves the use of derivatives to hedge their bets.

 

As the price of government bonds crashed, the funds were asked to pony up billions of pounds in collateral. In a scramble for cash, investment managers were forced to sell whatever they could — including, in some cases, more government bonds. That sent yields even higher, sparking another wave of collateral calls.

 

“It started to feed itself,” said Ben Gold, head of investment at XPS Pensions Group, a UK pensions consultancy. “Everyone was looking to sell and there was no buyer.”

 

The Bank of England went into crisis mode. After working through the night of Tuesday, Sept. 27, it stepped into the market the next day with a pledge to buy up to £65 billion ($73 billion) in bonds if needed. That stopped the bleeding and averted what the central bank later told lawmakers was its worst fear: a “self-reinforcing spiral” and “widespread financial instability.”

 

 

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  • Commissar SFLUFAN changed the title to Update: Bank of England intervenes in UK sovereign bond market again to prevent asset "fire sale", issues another warning of "material risk" to UK financial stability

Things are going swimmingly.

 

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Andrew Bailey, the governor of the Bank of England, says that the emergency intervention in the bond markets WILL come to an end on Friday

 

He tells pension funds, which are heavily invested in UK debt: 'You've only got three days left now. You've got to get this done'

 

He just essentially told the pension funds that they'd better have enough cash or other readily-liquidated assets on-hand for when the margin calls on their hedged positions come in.

 

This is effectively the BoE playing the world's worst game of "chicken" with UK government.

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17 minutes ago, marioandsonic said:

So what affect is/would this have on the global and US economy?

 

In the interim, it would increase the "flight to safety" of funds seeking the haven of the US dollar and US government bonds.

 

The overall impact to global financial markets would depend on their asset risk exposure to UK pension funds.

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  • Commissar SFLUFAN changed the title to Update: UK 30 year bond yield is now higher than that of the equivalent Greek bond
Just now, marioandsonic said:

How fucked is the UK now?


I think the actual situation isn’t entirely dire, just requires some sensible action by the government.

 

Oh wait, that is rather dire

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And the band marches on:

 

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A member of Truss's own cabinet tells me Truss's and Kwarteng's governance is so dire that some Tory MPs would vote against her in a confidence vote, preferring even a general election that cost them their seats to the current economic chaos

 

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“Something will need to happen as we can’t go on like this for over 2 years”, one level-headed Tory MP tells me.

 

Little over a month since Liz Truss became PM and already Conservative MPs are seriously suggesting she may have to go. What a turn of events.

 

“We’re either dead or a joke” says another Conservative MP, on the prospect of either keeping Liz Truss as PM or removing her just a month after the last leadership contest. 

 

“So bleak”.

 

 

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Volcanic night in the Conservative party

 

A senior Tory MP who attended 1922 said the PM "should never be trusted" with a financial statement again

 

"It's a bit like asking the gas engineer who has just blown up your house to come back and have another go"

 

 

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"If the 22 changed the rules, we'd hit the threshold for a confidence vote in a couple of hours", a Tory MP tells me. 

 

Safe to say the mood is sulphurous in parliament this morning

 

 

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