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Something I don't fully understand: - Let's say the UK treasure issues bonds. 10, 20, and 30-year bonds at 3%, which are then purchased by pensions. - Risk of r

Something I don't fully understand: - Let's say the UK treasure issues bonds. 10, 20, and 30-year bonds at 3%, which are then purchased by pensions. - Risk of recession grows, and the price of bonds fall and yields rise because risks go up. - The Bank of England buys bonds to prop up bond prices. - Since the UK treasury has already issued the bonds at a fixed rate, why do they care what the secondary aftermarket price of their bonds is? - How does propping up the bond market reduce the risk of the impending recession or help the UK treasury pay off its debt obligations? - Doesn't keeping yields low just help the treasury sell more cheap bonds (ie take out more debt)? I may have answered my own question. The problem with the greater than 100% Debt to GDP ratio means that, should they decide to stop printing money, they'd immediately go into default on existing debt, regardless of the interest rate. What if the UK Gov't passed a law to prevent the treasury from issuing any new bonds, and the Bank of England stopped QE. The UK would go into austerity, while it reduces the Debt to GDP. What if interest rates were then dropped to zero to stimulate the economy. There would be inflation until the economy finds equilibrium with all the extra money that has already been printed. Reducing interest rates will devalue the British Pound - and Britain is a net importer. So, yeah.. thats no good. Check mate indeed.

nickff 4y ago
The UK's bond issues have a lot to do with how their pension funds are structured. If you want to learn a bit more about it, the latest Bloomberg Odd Lots podcast is quite good: https://www.bloomberg.com/news/articles/2022-10-06/odd-lots-podcast-uk-market-madness-with-toby-nangle-gbp?srnd=oddlots-podcast https://www.bloomberg.com/news/articles/2022-10-06/odd-lots-...
goodcanadian 4y ago
Since the UK treasury has already issued the bonds at a fixed rate, why do they care what the secondary aftermarket price of their bonds is? As I think you figured out for yourself, it affects the interest rate that they have to pay on new issues. Even when the budget is balanced (HA!), they are still constantly issuing new bonds to pay off maturing ones. How does propping up the bond market reduce the risk of the impending recession or help the UK treasury pay off its debt obligations? Buying bonds puts more cash into circulation which can (at least in theory) act as an economic stimulus. Of course, it also increases the risk of price inflation.
dartmoth89 4y ago
The primary problem is that the pension funds are leveraged. You are right that eventually the bond value will recover, which is why bonds pension bought are not just sitting there, they are used as collaterals for more cash to buy other assets. As their value fell, there will be a temporary issue of banks asking pension funds for more collaterals or the cash back. If the funds didn't have any (and they don't), the options are: a. pensions sell all assets, b. banks sell all collaterals.
- substation13 4y ago
  Yep. An important concept is a "margin call". Funds are allowed leverage but within limits, and when the value of their assets (e.g. bonds) decreases then the leverage can increase. They need to put up more collateral (e.g. cash) to reduce the leverage to within agreed limits. But suppose that many funds are in the same situation at the same time! Now that collateral is more expensive and the leveraged assets are worth less. This can lead to collapses across the sector, which the BoE is very keen to prevent. Hence they intervened to prop up the assets.
badpun 4y ago
> - Let's say the UK treasure issues bonds. 10, 20, and 30-year bonds at 3%, which are then purchased by pensions. - Risk of recession grows, and the price of bonds fall and yields rise because risks go up. - The Bank of England buys bonds to prop up bond prices. > - Since the UK treasury has already issued the bonds at a fixed rate, why do they care what the secondary aftermarket price of their bonds is? Most government are constantly issuing new bonds (to roll over existing debt if nothing else), so the secondary market of their own bonds is a direct competition to the new bonds they want to issue.
- saurik 4y ago
  But if they are buying their bonds to prop up the price of... selling bonds? that seems like it wouldn't really accomplish anything, as they would probably just be losing money on the spread of those two simultaneous actions.
  - refurb 4y ago
    My understanding (from how the fed does it) is the buying of bonds influences the rest of the lending market since sovereign bonds are the “risk free benchmark”. They don’t care about the bonds the Lu are buying, they care about the market price it sets.
  - abm53 4y ago
    The government are not buying bonds to prop up the price. The Bank of England are (and the distinction is very important to that market).
  - colinmhayes 4y ago
    Treasury bonds set the lower limit for interest rates in the currency. Why would anyone write a 30 year mortgage at 3% when they can buy a bond backed by the government for 5%? The central bank wants people to be able to get loans so they prop up the price of the bond.
Denvercoder9 4y ago
> The problem with the greater than 100% Debt to GDP ratio means that, should they decide to stop printing money, they'd immediately go into default on existing debt, regardless of the interest rate. There's nothing that changes at a 100% debt-to-GDP ratio, and it doesn't have to mean a default. E.g. if the debt has an average yield of 3% and uniformly matures over the next 20 years, even at a 100% debt-to-GDP ratio the yearly cost to service the debt is at most 8% of GDP.
- arcbyte 4y ago
  Theoretically if every outstanding note called the balance due then default is inevitable. It's not a practical milestone but it's a milestone nonetheless.
  - RandomLensman 4y ago
    Nothing to do with debt/GDP. GDP is a flow measure, if you cannot pay back the debt in your example that means the total assets are lower than the sum of debt (otherwise could sell assets). Some countries have more private savings than GDP, for example. (Setting aside that sovereign debt might not have a put option in them to start with).
  - colinmhayes 4y ago
    No default is not inevitable. Bonds get paid on a schedule, they can’t just “call the balance due”. The government can just keep pushing the debt into the future by buying new bonds as long as the economy grows.
  - xmcqdpt2 4y ago
    They can’t "call the balance due" though. UK gilts (and most other government bonds) are fixed term and can't be redeemed early.
roenxi 4y ago
> Since the UK treasury has already issued the bonds at a fixed rate, why do they care what the secondary aftermarket price of their bonds is? The UK parliament has identified that when large numbers of people go bankrupt all the parliamentarians get into trouble, so it requires that the Bank of England take an interest in the secondary market for bonds. A lot of people with debts will be sent bankrupt if there is an available mechanism to get a yield because at the moment lots of money is deployed to people who can't make a meaningful return on it (turns out this includes a lot of pension funds). It'll be redeployed if yields go up.
puppymaster 4y ago
Bonds usually get bid up during recession. Risk free, safe asset. The problem right now is Feds performing QT and raising rate in the midst of recession fear.

nickff 4y ago

The UK's bond issues have a lot to do with how their pension funds are structured. If you want to learn a bit more about it, the latest Bloomberg Odd Lots podcast is quite good: https://www.bloomberg.com/news/articles/2022-10-06/odd-lots-podcast-uk-market-madness-with-toby-nangle-gbp?srnd=oddlots-podcast https://www.bloomberg.com/news/articles/2022-10-06/odd-lots-...

goodcanadian 4y ago

Since the UK treasury has already issued the bonds at a fixed rate, why do they care what the secondary aftermarket price of their bonds is? As I think you figured out for yourself, it affects the interest rate that they have to pay on new issues. Even when the budget is balanced (HA!), they are still constantly issuing new bonds to pay off maturing ones. How does propping up the bond market reduce the risk of the impending recession or help the UK treasury pay off its debt obligations? Buying bonds puts more cash into circulation which can (at least in theory) act as an economic stimulus. Of course, it also increases the risk of price inflation.

dartmoth89 4y ago

The primary problem is that the pension funds are leveraged. You are right that eventually the bond value will recover, which is why bonds pension bought are not just sitting there, they are used as collaterals for more cash to buy other assets. As their value fell, there will be a temporary issue of banks asking pension funds for more collaterals or the cash back. If the funds didn't have any (and they don't), the options are: a. pensions sell all assets, b. banks sell all collaterals.

substation13 4y ago
Yep. An important concept is a "margin call". Funds are allowed leverage but within limits, and when the value of their assets (e.g. bonds) decreases then the leverage can increase. They need to put up more collateral (e.g. cash) to reduce the leverage to within agreed limits. But suppose that many funds are in the same situation at the same time! Now that collateral is more expensive and the leveraged assets are worth less. This can lead to collapses across the sector, which the BoE is very keen to prevent. Hence they intervened to prop up the assets.

badpun 4y ago

> - Let's say the UK treasure issues bonds. 10, 20, and 30-year bonds at 3%, which are then purchased by pensions. - Risk of recession grows, and the price of bonds fall and yields rise because risks go up. - The Bank of England buys bonds to prop up bond prices. > - Since the UK treasury has already issued the bonds at a fixed rate, why do they care what the secondary aftermarket price of their bonds is? Most government are constantly issuing new bonds (to roll over existing debt if nothing else), so the secondary market of their own bonds is a direct competition to the new bonds they want to issue.

saurik 4y ago
But if they are buying their bonds to prop up the price of... selling bonds? that seems like it wouldn't really accomplish anything, as they would probably just be losing money on the spread of those two simultaneous actions.
- refurb 4y ago
  My understanding (from how the fed does it) is the buying of bonds influences the rest of the lending market since sovereign bonds are the “risk free benchmark”. They don’t care about the bonds the Lu are buying, they care about the market price it sets.
- abm53 4y ago
  The government are not buying bonds to prop up the price. The Bank of England are (and the distinction is very important to that market).
- colinmhayes 4y ago
  Treasury bonds set the lower limit for interest rates in the currency. Why would anyone write a 30 year mortgage at 3% when they can buy a bond backed by the government for 5%? The central bank wants people to be able to get loans so they prop up the price of the bond.

Denvercoder9 4y ago

> The problem with the greater than 100% Debt to GDP ratio means that, should they decide to stop printing money, they'd immediately go into default on existing debt, regardless of the interest rate. There's nothing that changes at a 100% debt-to-GDP ratio, and it doesn't have to mean a default. E.g. if the debt has an average yield of 3% and uniformly matures over the next 20 years, even at a 100% debt-to-GDP ratio the yearly cost to service the debt is at most 8% of GDP.

arcbyte 4y ago
Theoretically if every outstanding note called the balance due then default is inevitable. It's not a practical milestone but it's a milestone nonetheless.
- RandomLensman 4y ago
  Nothing to do with debt/GDP. GDP is a flow measure, if you cannot pay back the debt in your example that means the total assets are lower than the sum of debt (otherwise could sell assets). Some countries have more private savings than GDP, for example. (Setting aside that sovereign debt might not have a put option in them to start with).
- colinmhayes 4y ago
  No default is not inevitable. Bonds get paid on a schedule, they can’t just “call the balance due”. The government can just keep pushing the debt into the future by buying new bonds as long as the economy grows.
- xmcqdpt2 4y ago
  They can’t "call the balance due" though. UK gilts (and most other government bonds) are fixed term and can't be redeemed early.

roenxi 4y ago

> Since the UK treasury has already issued the bonds at a fixed rate, why do they care what the secondary aftermarket price of their bonds is? The UK parliament has identified that when large numbers of people go bankrupt all the parliamentarians get into trouble, so it requires that the Bank of England take an interest in the secondary market for bonds. A lot of people with debts will be sent bankrupt if there is an available mechanism to get a yield because at the moment lots of money is deployed to people who can't make a meaningful return on it (turns out this includes a lot of pension funds). It'll be redeployed if yields go up.

puppymaster 4y ago

Bonds usually get bid up during recession. Risk free, safe asset. The problem right now is Feds performing QT and raising rate in the midst of recession fear.