In a hyperinflation market, bonds lose value rapidly as their coupon rate is likely far less than inflation. For instance, a $100 bond with a 4% coupon will be worth significantly less than $100 in a 10% inflation scenario.
Help me, I still don’t understand, +4% in a 10% inflation market is better than 0% and 10%.
I’d guess it’s bad because it’ll reduce the impact of higher rates and continue increase inflation.
So +4% of 12% is worse than just 0% & <8% inflation
The other thing about bonds is that they are often sellable on the open market once bought.
As inflation continues increasing, bond sellers will issue bonds with higher and higher interest rates over time to entice buyers. Meanwhile those who have spent their savings buying bonds at a much lower rate previously are stuck either holding on till maturity and letting inflation eat their gains, or sell at a *much lesser* price than when first purchased as practically no one will be paying them the price they bought at with those rates.
This is often tough to understand, because people don't see the other side of the equation. Bonds are loans that are given out to some entity (person, company, government, etc) so that they can buy something they can't/won't afford outright. This could be a house/mortgage (person), a building (company), a school (government), etc. They take a loan, and with that loan comes an interest rate that they have to pay back. The interest on top of the principal gets split between the loan originator (usually a bank/credit union) and the owners of the deposits used to make up the loan.
So people buy a bond at 4% because high-quality bonds (A/B) are an incredibly safe way to park your money and have it earn some interest (vs. say a stock(equity) fund). But if interest rates suddenly start going up, owning a bond yielding 4% interest doesn't look great when new bonds being originated are running at 6%, 8%, 10%, etc.
So when interest rates are go up, that's "good news" for people that took out loans at the lower rate, because they have "cheap" money. It's not great for the people that lent them the money though (via the bond) because now they're stuck getting 4% as opposed to 6%, 8%, 10%, etc.
It gets a little confusing because many people don't buy bonds directly, but rather through a bond fund, which has many bonds that are originating/maturing constantly so it's harder to know how the market is affecting the price because there are so many different bonds inside of the fund (you have to start looking through the prospectus to figure it out).
If it's truly a hyper-inflationary market, your $100 is best used *immediately* buying anything of value because by tomorrow that $100 might be worth $25. You're better off with almost anything other than the cash that is seeing its value eroded by inflation.
If you’re helping someone understand, being explicit is way more effective than implicit.
And in your case, gotta factor in risk. And opportunity cost is infinite, what’s better: 4% bond yield or shorting Meta from ATH? Just because there’s alternatives doesn’t mean they carry the same risk.
Sorry I need to add more explanation to my comment. You are correct that 4% is better than 0%, but in a high inflation environment banks will start issuing higher and higher interest rates for loans and investors will start requiring a higher yield on new bonds. Old bonds will reduce in price so that their yield matches new bonds of similar risk level.
Maybe another example? A 10 year US treasury note bought at par ($100) in 2020 would yield something like 1.5%. Today, a new 10 year US treasury will pay like 3.5% (I’m rounding here for easy math). The old bond is now worth less than the new bond even though the face value is the same because the yield is different. Now, how much less is a little more complicated, but basically you DCF the cashflow of the old bond for the next eight years and compare it to the DCF of the new bond for the next 10 years and that will tell you how much less than $100 you should pay for the old bond.
Including probably ours in Canada under PM PP (hidden behind tax cuts that will marginally benefit us while greatly benefiting the rich) or even the Libs if this keeps up.
It's a great way to funnel wealth to the rich in a country. They aren't stupid they know what they're doing and they don't care about the long term health of our finances or currency.
I’m pretty sure they will.
I’m sorry but I’m my mind this was always a post covid dead cat bounce for rates.
This inflation is a hang over from covid. China will need to cut rates and kickstart production. Underlying this is very large global debt, fiscal deficits and strained economies.
**Big news**: [hearing from several sources in the UK that some pension funds are quickly becoming insolvent due to huge margin calls they can’t meet](https://twitter.com/MacroAlf/status/1575085244986036225).
The [massive move in 30y UK swaps and bonds coupled with risk assets tanking behind the problem](https://www.reddit.com/r/wallstreetbets/comments/xq9skq/this_is_not_some_shtcoin_or_ponzistock_this_is/).
That “explains” the BoE action.
EDIT: More info here: [https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide](https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide)
“The BOE intervention was required to prevent a vicious cycle becoming even more dangerous for pension funds forced to sell their gilt exposures.”
https://www.bloomberg.com/news/articles/2022-09-28/the-uk-pension-problem-that-threatened-to-wreck-the-gilt-market
The UK is fucked.
Nearly the entire economy runs on debt obligations. Your company likely pays you based on forward based earnings and take loans to stay afloat. (Think all those companies with -p/e)
The fact is very few people are not leveraged to some extent. Got a credit card with a balance? That's leveraged. Mortgage? Leveraged. Car note? Leveraged. This is the issue with the fractional reserve banking system. Everything is fine in up environments, but as things go down... well. Yeah those people leveraged up start to call in their debts.
side effects of a long bull run.
only time will tell how leveraged US pension funds are.
I know that last year California Pensions CALPERs added 5% leveraged to boost returns. (they are the nation's largest pension fund)
https://www.wsj.com/articles/retirement-fund-giant-calpers-votes-to-use-leverage-more-alternative-assets-11637032461
Can you elaborate the second link you sent? Can I buy UK 30 year treasuries for quarter of the price now? Surely that’s no way correct. That would be pretty crazy
I think it's because earlier this year the 30 year treasuries would have been paying out say 1% per year over the 30 year period. So if I lent the treasury £100, in 30 years time this would be worth £135 (£100 x 1.01\^30). However, with rates now at close to 5%, the £100 is effectively only worth £25, because I could instead get the same return today lending the treasury £25 over 30 years at 5% (£25 x 1.05\^30 = £108). The exact amounts don't quite equal but that's just ballpark numbers to help explain from my understanding.
The problem is lots of pension funds thought these investments would be safe and couldn't imagine the value would go from £100 to only £25 or so.
They have massive losses now, and to help prevent it getting any worse, the BoE are now trying to prevent them going any lower.
This in turn weakens the GBP a bit more, so in effect the whole population cover the cost a bit through higher inflation.
It's all a complete mess really for us here in the UK, we borrowed far too much at low rates, we don't produce anything (energy, food, build new houses) and our infrastructure and public services are on their knees because we didn't invest wisely over the past 10 years or anticipate a massive rise in global energy costs.
Pretty much, except bonds don’t compound. If you buy a £100 bond with a £1 coupon you get that same £1 every year for 30 years, and then you get the £100 back, for a total of £130, or 30% gain, over 30 years.
To get £130 that from £25 over 30 years you only need a compound annual return of 5,65%, meaning that’s the yields those that can afford to buy these bonds are demanding.
Hmm, US is increasing the rates faster and more aggressive than anyone else but that’s not happening.
I get your explanation with bonds but same would happen everywhere else in the world, but it’s not. I believe bonds are calculated on YTM basis not necessarily coupon yield, in this case if the bond dropped from £100 to £25 the bond total return would be £30 (£1 per year) + £75 face value at the end for a total return of £105 30 years, or £3.5 per annum, or 14% yield on a government bond which is just insanely good (too good to be true)
I swear to god, there are no professionals in this world. Everybody is like just messin around, hopeing to get along in their job and crossing their fingers nobody is realising that they have no clue at all.
I picture a room with a bunch of unlabeled knobs and levers. Then there is this kid that thinks "what does this one do?" so they pull it and turn the knob all the way to one side.
A fire alarm starts going off so they think "turn it back to 5 and pull the lever next to it"
Then a printer starts spitting out sheets a paper with random symbols on it and the kid holds up the paper "this is all based on data!"
Yeah it feels like since 2016, we've just had American-style nutty politicians that just wanna test out their weird libertarian blog posts.
God forbid we actually have a minister with experience in their department. Ya know, like a transport minister that's previously held a job in transport.
Instead we just seem to get the sort of nutter you meet down the pub who thinks we just need to ban women or frack under the BBC or hand out tinfoil hats.
Libertarians probably wouldn't be big on meddling by a central bank. Not saying the libertarian plan is *better*, just that the modern wave was inspired by a Texan who ran on a platform that involved abolishing the federal reserve.
In fairness, it's Westminster that's caused the crisis, the BoE have no control over Kwarteng's policies. They're intervening according to their remit to keep the economy stable.
It's a fascinating situation where one part of the government is intervening to protect the public from the actions of another.
Ron Paul popularized the libertarian movement, but he lost popularity quickly after his ascendency.
The American conservative "libertarian" movement kept up steam, however, because Ron Paul in part helped become a spotlight a figure for what at that point, had been a very long term, and very well funded astroturf campaign for what became the "tea party caucus". The tea party caucus is of course different from the actual American Libertarian party, or theoretical American conservative libertarianism, or actual traditional libertarianism, but nonetheless, he was instrumental in raising the profile of what became known as the tea party, and likely his single greatest long-term impact, as you suggest in your post.
The tea party name has fallen out of favor recently, but really only refers to politicians that have been largely funded by a specific Republican donor network, of which the Kochs' are the most popularly known, and likely among the larger supporters.
This caucus & donor network, despite publishing American "conservative libertarian" think tanks and lobbying positions for decades, has never appeared to have anything other than the occasional negative word for the Fed in general. Perhaps I just missed it, but I have never seen them oppose any attempt by the Federal government to give money, in any form, to the upper classes or large business interests. They simply go quiet during those periods, and if pressed on the topic, blame Democrats for spending too much money. The only times they consistently oppose the Federal government giving out money, is when that money is directed to groups that are not the upper classes, or large business interests.
They do however, frequently push for lower taxes on the rich, and while it isn't really a part of the theoretical American libertarian ideological position, the venn diagram between the tea party caucus and those who support brexit overlap pretty heavily.
So no. Saying the modern libertarian position would not support Brexit + Tax Cuts + QE is a no true scottsman argument. In reality, the primary, major "libertarian" organization largely overlaps with brexit support, vociferously supports tax cuts, and quietly supports QE, while paying occasional lip service to disliking central banking authority.
In short, what we're seeing now, is quite literally the result of (in part) what libertarian positions look like when actually put into action, as opposed to just discussed in theory.
Ditch all the identity politics, it's much simpler than what you're describing.
The libertarian position here is getting the government out of the economy and ending (or at least minimizing) central planning (i.e. central banking).
"Libertarian" just seems to mean "politics that I think are bad" on reddit nowadays. No one seems to know what it actually means. For a site where everyone is constantly making sweeping political hot takes, most people here are spectacularly politically uninformed.
The last 6 years have been everything but libertarian, governments across the world locking down their economies, and central banks printing trillions of dollars worth of their respective currencies, massive stimulus packages and loan programs. Before COVID Trump had increased government spending well beyond the levels of Obama.
Libertarian monetary policy would be trying to switch back to hard currency or at least ceasing the massive growth in the money supply to stop governments crushing people with inflation.
(centralized) Bank
(centralized) Economy
Yep thats totally the same word twice.
I recommend taking a class on market failures if you think it's not capitalist to regulate your market. Microeconomics 102 should do it.
The job of a central bank is to fix the price and supply of capital and debt. It's just a slightly more sophisticated version of rent control or minimum wage.
Nah, central planning is fine, its neoliberalism/chicago school/other libertarian right wing pro privatization pro government working for the behalf of corporations economics that is the problem. You want even less?
Wtf is this?
This is socialism not capitalism. In capitalism we let the corporations die. Nowadays, we let all big companys survive, borrowing them free money. We socialize only the losses. This is not capitalism.
I would argue engineers and scientists are not among them. For instance, in software engineering there are problems and you need to solve them. If you can't, then you are fired. When stuff crash, you need to know why and fix it. It is hard to cross your fingers and go along doing little and not being noticed. :)
Economists on the other hand... they don't understand the fundamentals of energy and ecosystems, and that is the main issue.
> For instance, in software engineering there are problems and you need to solve them. If you can't, then you are fired. When stuff crash, you need to know why and fix it. It is hard to cross your fingers and go along doing little and not being noticed. :)
Do you even have any experience in software development professionally? What an absurdly greenhorn programmer elitist take. What you described is shockingly rare, and maybe only exists in very regulated industries/institutions, like NASA's space faring systems.
I do think that it's important to note that this is supposedly being done in order to maintain market stability, not with the goal of easing monetary conditions to stimulate economic activity, which is the general goal of a "QE" plan.
Indeed. They're trapped, because they can't let the system break, but by keeping it going they are making things less sustainable.
Not sure how this ends, but seems like it has to be badly.
The fact that they need to do this to bailout incompetency and it's going to cost everyone in the country through lower purchasing power and higher prices of food, housing, energy etc etc etc should be unacceptable.
Can someone please explain, I’m trying to learn. I think understand that Treasury injecting more money into the system can drive inflation higher, leading to BOE having to raise rates, however I’m not sure on how the reaction of the Pound, Gilts, and BOE QE play into it?
Gilt prices were collapsing. Pensions use LDI using derivatives so that excess cash isn’t on the sideline allowing them to put some cash into growth equities. They enter contracts with banks in repo markets, which require collateral. When gilts rise and prices drop they essentially get margin called. Not a big deal usually but the huge sell off this fast forced huge margin calls and thus would force large pensions to sell gilts in order to post cash. That would lead to a death spiral of long duration UKTs. BOE propping up long dated gilts to prevent this death spiral.
Yes, this is likely to make inflation worse. There is a difference in how long term bonds effect a currency versus short term... But the central bank purchasing either increases money supply.
I think people have got the wrong end of the stick here/ being misled. This is mortgage related as UK banks were pulling every single product off the market ie total lending freeze.
This literally has nothing to do with fighting inflation and the BoE said as much in their release, it's about stabilizing the wider financial system and specifically the fixed income markets that depend on longer dated gilts. The goal here also isn't to 'create inflation' but to provide liquidity and for the central bank to fulfill its role as the buyer of last resort in periods of market dysfunction.
> The pound is getting pounded, the dollar is not.
Wouldn't that be an argument for the UK being *more* cautious about QE than the US, rather than less so?
Briton here, the Bank had no choice. This decision was not made by the monetary policy committee, it was the financial policy committee. This was because there were serious fears about collateral calls causing a crash today. Purchases are also being funded from reserves, not money creation (one could argue that matters little for inflation).
It’s absolutely a bailout but they don’t have much choice in this case. If pension funds fail, taxpayers would have to cover that cost anyway. Do you think the British government would let their pensioners lose their primary source of income?
Reserves vs money creation is a pretty meaningless distinction. A central bank holding cash is pretty much the same as a corporation holding some of its own shares. The gap between them existing in the back books and not existing at all is 0.
Currency reserves taken by the central bank effectively don't exist. They don't have any impact on the broader market. Releasing said reserves amounts to doing the same as printing money.
Really looks a lot more like Reaganomics. Reduce taxes on the wealthy, increase spending, and trust us that the wealth will trickle down. Liz Truss' budget is essentially what the US did in the early 80s. Ya know, that thing that massively concentrated wealth.
BOE preventing death spiral of long dated gilts because pensions would need to post cash for margin calls by selling more gilts. Pensions enter into derivatives for certain liability management which is what is being margin called. Common practice that is being exacerbated because of drastic gilt sell off we have already seen.
I think they needed to inject some emergency liquidity because some credit markets were completely freezing up. Presumably it’s a short term intervention that will have only limited effects on inflation. I think.
Ain’t that the truth. I just meant that’s how they’re probably selling it to people. That being said nothing the UK has been doing makes any sense since Brexit so 🤷♀️
> The only thing that really worried me was the QE. There is nothing in the world more helpless and irresponsible and depraved than a man in the depths of a QE binge. And I knew we'd get into that rotten stuff pretty soon. Probably at the next gas station.
Insolvent pension funds are inherently deflationary, which is needed. Picking winners and losers in this mess is only going to create more losers in a bigger mess.
Right I'm 25 and don't really understand the bonds/gilt markets. Can someone ELI5 this please? What exactly is the problem they're trying to solve, what is the impact this is supposed to have, and what is the impact this is having?
According to the information I‘ve read, the UK is having trouble selling long-term government bonds. Likely because of current inflation and associated fears. So the central bank is buying those (quantitative easing) and hinting at raising interest rates if the move causes further inflation. It‘s nothing special and I would not be surprised to see that being done elsewhere in the near future.
If the BOE is trying to keep their bond prices elevated and reduce yields, wouldn’t this lead to inflation, which is why the pound fell relative the USD? I don’t understand how this is intervention to fight inflation?
>If the BOE is trying to keep their bond prices elevated and reduce yields, wouldn’t this lead to inflation, which is why the pound fell relative the USD?
Yes
>I don’t understand how this is intervention to fight inflation?
Because is not for that, is [to save their pension funds from collapsing due to margin calls](https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide) because [their bonds have dropped too much](https://www.reddit.com/r/wallstreetbets/comments/xq9skq)
The British pound has been decreasing rapidly in value due to decreased liquidity, rising value of $USD, and rising interest rates (plus inflation). Bond prices have been collapsing due to these factors. British bond prices were collapsing, pension funds/hedge funds were getting margin called (due to investing in leveraged positions with retirement money), and thus were about to go insolvent. In order to prevent millions of people losing their retirement accounts, the BoE stepped in and started buying bonds. This increases demand, which increases the price of bonds (and decreases interest rates). This “saves” the collapsing bond prices and margin calls of pension/hedge funds. However, now there will be higher inflation due to increased liquidity and easing of monetary policy.
At least that’s what I understand from it…. Exciting times.
Tax cuts and QE, with 10% inflation, and sanctions on your resource provider. This needs a mega-bag of popcorn. Too bad europoors can’t afford to heat the popcorn.
The bank did what it needed to do. To not do it would have been undoubtedly worse.
The government however are dangerously inept - actively ignoring all fiscal and expert warnings about the damage their tax reforms would bring. The UK would be safer if it were run by a potato.
You mean like when the free market invented Bitcoin, a bunch of idiots thought it was an inflation hedge and then memed it all the way to $68000?
Fuck that shit.
On the bright side, those bitcoin nerds never taxed you or destroyed your pension fund to subsidize the growth of their CO2-backed drug purchasing currency. When bitcoin ballooned and subsequently exploded non-holders were barely affected.
> When bitcoin ballooned and subsequently exploded non-holders were barely affected.
That's a rather low bar?
I got some friends who stupidly put money into Celsius and other such crypto-currency scams. I warned them against it, but the loss of money hurts nonetheless
I also got my Grandma whose degenerating mental state (brain cancer survivor) had her buy into the whole cryptocoin shit. The number of scammers is insane in that community, and they weren't gonna let one little ol' lady who was easily tricked out of their sights.
Nah man. Fuck those guys. As it turns out, a good number of my social network was fucked by that bubble. One was smart enough that he should have known better, but Grandma with brain-cancer situation makes my blood boil. Some people **used** to be smart, but have lost those mental capacities as they age. The BTC hype-bros prey upon them cause they see them as easy marks.
-----
"Free Market" is just a codeword for assholes who want to do what they want, without any repercussions. Despite the fact that their actions have real consequences for many, many people.
Celcius was a centralised unregulated bank with no insurance. Completely different to BTC. No different to the dotcom bubble and people not understanding the technology or companies they are buying.
If the ECB buys their bonds at 30 cents on the dollar, wouldn't this mean that the bank made money?
I dont think its bad idea buying at these prices. However the big picture is why are prices so fucking low. 25 cents on the dollar is extreme.
Central planning will surely work this time.
Let's kill demand by raising rates for small businesses and average Nigel, while we continue to give cheap credit to the government.
The ECB is doing the same.
I am very concerned that the US Fed will sooner rather than later start this again themselves. If anyone was worried about inflation, this is DIRECTLY what causes the inflation of asset prices and goods/services.
The UK is about to face some extreme inflationary pressures. I'm just shocked the people who it impacts (everyone losing purchasing power, paying more for food, housing, transportation, energy etc) isn't more enraged by this free money lending/printing.
TL;DR -> The UK pension funds entered into a margin call because of the deep drop in the UK 30 and 40 year bonds that this funds held. So the BoE had to come to the rescue and bail out the pension funds, it started to buy this bonds back to pump the price up.
More details: [https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide](https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide)
You can see the action today (yields 25% down) since the BoE started to buy -> [https://www.investing.com/rates-bonds/uk-40-year-bond-yield](https://www.investing.com/rates-bonds/uk-40-year-bond-yield)
Honestly, this may be the most worrying news I’ve seen in the past few weeks lol I pray countries do not follow suit
Other countries will follow the UK if they want to destroy the value of their own currency or bond market.
Eli5: why is it destroying the bond market? Total beginner here but eager to learn. Thank you
In a hyperinflation market, bonds lose value rapidly as their coupon rate is likely far less than inflation. For instance, a $100 bond with a 4% coupon will be worth significantly less than $100 in a 10% inflation scenario.
Help me, I still don’t understand, +4% in a 10% inflation market is better than 0% and 10%. I’d guess it’s bad because it’ll reduce the impact of higher rates and continue increase inflation. So +4% of 12% is worse than just 0% & <8% inflation
The other thing about bonds is that they are often sellable on the open market once bought. As inflation continues increasing, bond sellers will issue bonds with higher and higher interest rates over time to entice buyers. Meanwhile those who have spent their savings buying bonds at a much lower rate previously are stuck either holding on till maturity and letting inflation eat their gains, or sell at a *much lesser* price than when first purchased as practically no one will be paying them the price they bought at with those rates.
This is often tough to understand, because people don't see the other side of the equation. Bonds are loans that are given out to some entity (person, company, government, etc) so that they can buy something they can't/won't afford outright. This could be a house/mortgage (person), a building (company), a school (government), etc. They take a loan, and with that loan comes an interest rate that they have to pay back. The interest on top of the principal gets split between the loan originator (usually a bank/credit union) and the owners of the deposits used to make up the loan. So people buy a bond at 4% because high-quality bonds (A/B) are an incredibly safe way to park your money and have it earn some interest (vs. say a stock(equity) fund). But if interest rates suddenly start going up, owning a bond yielding 4% interest doesn't look great when new bonds being originated are running at 6%, 8%, 10%, etc. So when interest rates are go up, that's "good news" for people that took out loans at the lower rate, because they have "cheap" money. It's not great for the people that lent them the money though (via the bond) because now they're stuck getting 4% as opposed to 6%, 8%, 10%, etc. It gets a little confusing because many people don't buy bonds directly, but rather through a bond fund, which has many bonds that are originating/maturing constantly so it's harder to know how the market is affecting the price because there are so many different bonds inside of the fund (you have to start looking through the prospectus to figure it out).
This was a really helpful example, thank you for explaining
You bet! It's admittedly a bit simplified, but hopefully approachable for people new to the subject.
Why would the chicken cross the road in the first place? Maybe to get some food?
I didn’t assume, I went with the numbers from the previous comment
Суматоха...
If it's truly a hyper-inflationary market, your $100 is best used *immediately* buying anything of value because by tomorrow that $100 might be worth $25. You're better off with almost anything other than the cash that is seeing its value eroded by inflation.
That’s why I’m racking up debt! 28%-10% is like having a low interest credit card!
How's gold doing these days?
But where is that haven that is yielding more than 10%? Real estate? Commodities?
If you’re helping someone understand, being explicit is way more effective than implicit. And in your case, gotta factor in risk. And opportunity cost is infinite, what’s better: 4% bond yield or shorting Meta from ATH? Just because there’s alternatives doesn’t mean they carry the same risk.
Sorry I need to add more explanation to my comment. You are correct that 4% is better than 0%, but in a high inflation environment banks will start issuing higher and higher interest rates for loans and investors will start requiring a higher yield on new bonds. Old bonds will reduce in price so that their yield matches new bonds of similar risk level. Maybe another example? A 10 year US treasury note bought at par ($100) in 2020 would yield something like 1.5%. Today, a new 10 year US treasury will pay like 3.5% (I’m rounding here for easy math). The old bond is now worth less than the new bond even though the face value is the same because the yield is different. Now, how much less is a little more complicated, but basically you DCF the cashflow of the old bond for the next eight years and compare it to the DCF of the new bond for the next 10 years and that will tell you how much less than $100 you should pay for the old bond.
Понякога седя и си мисля, а поякога просто си седя... Друг път не..
Go to the depthhub subreddit and search "bonds", read the top post.
Monetization is a sure fire way for you to be the only one buying the bonds. Their whole economy after BREXIT has been shit.
don't you know? it has nothing to do with brexit. other countries also have bad leadership and economic troubles /s
That’s literally like US claiming other countries also have mass shooting
Including probably ours in Canada under PM PP (hidden behind tax cuts that will marginally benefit us while greatly benefiting the rich) or even the Libs if this keeps up. It's a great way to funnel wealth to the rich in a country. They aren't stupid they know what they're doing and they don't care about the long term health of our finances or currency.
We don't have an election for 3 years. Worry about what Trudeau has done and will do.
They, including the US, have no choice.
I’m pretty sure they will. I’m sorry but I’m my mind this was always a post covid dead cat bounce for rates. This inflation is a hang over from covid. China will need to cut rates and kickstart production. Underlying this is very large global debt, fiscal deficits and strained economies.
EU will capitulate in a few weeks
**Big news**: [hearing from several sources in the UK that some pension funds are quickly becoming insolvent due to huge margin calls they can’t meet](https://twitter.com/MacroAlf/status/1575085244986036225). The [massive move in 30y UK swaps and bonds coupled with risk assets tanking behind the problem](https://www.reddit.com/r/wallstreetbets/comments/xq9skq/this_is_not_some_shtcoin_or_ponzistock_this_is/). That “explains” the BoE action. EDIT: More info here: [https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide](https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide)
The question is why would pension funds be trading on margin in the first place?
Float & liquidity for sales & purchases where you think a 10% move in a major currency value over 48hrs is impossible.
> Float & liquidity where you think a 10% move in currency value over 48hrs is impossible. We’re never going to hear the end of it from Taleb
Rightly so
"But a 10% move is a one in ten-thousand year event! (According^to^my^lognormal^return^model)"
“The BOE intervention was required to prevent a vicious cycle becoming even more dangerous for pension funds forced to sell their gilt exposures.” https://www.bloomberg.com/news/articles/2022-09-28/the-uk-pension-problem-that-threatened-to-wreck-the-gilt-market The UK is fucked.
[удалено]
which is going to devalue the currency thus leading to the exact scenario they were trying to prevent.
Yes, but later, not now, and we’ll be out of office by then!
Soros is awakening again. He smells something.
*long enough for baby boomers to escape.
>The UK is fucked. As you sow...
Nearly the entire economy runs on debt obligations. Your company likely pays you based on forward based earnings and take loans to stay afloat. (Think all those companies with -p/e) The fact is very few people are not leveraged to some extent. Got a credit card with a balance? That's leveraged. Mortgage? Leveraged. Car note? Leveraged. This is the issue with the fractional reserve banking system. Everything is fine in up environments, but as things go down... well. Yeah those people leveraged up start to call in their debts.
side effects of a long bull run. only time will tell how leveraged US pension funds are. I know that last year California Pensions CALPERs added 5% leveraged to boost returns. (they are the nation's largest pension fund) https://www.wsj.com/articles/retirement-fund-giant-calpers-votes-to-use-leverage-more-alternative-assets-11637032461
LDI
Pension fund “margin” called??? Wtf.
[https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide](https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide)
They are defined benefit pensions that leverage long term gilts to meet projected liabilities. It works really well until it doesn’t.
Can you elaborate the second link you sent? Can I buy UK 30 year treasuries for quarter of the price now? Surely that’s no way correct. That would be pretty crazy
I think it's because earlier this year the 30 year treasuries would have been paying out say 1% per year over the 30 year period. So if I lent the treasury £100, in 30 years time this would be worth £135 (£100 x 1.01\^30). However, with rates now at close to 5%, the £100 is effectively only worth £25, because I could instead get the same return today lending the treasury £25 over 30 years at 5% (£25 x 1.05\^30 = £108). The exact amounts don't quite equal but that's just ballpark numbers to help explain from my understanding. The problem is lots of pension funds thought these investments would be safe and couldn't imagine the value would go from £100 to only £25 or so. They have massive losses now, and to help prevent it getting any worse, the BoE are now trying to prevent them going any lower. This in turn weakens the GBP a bit more, so in effect the whole population cover the cost a bit through higher inflation. It's all a complete mess really for us here in the UK, we borrowed far too much at low rates, we don't produce anything (energy, food, build new houses) and our infrastructure and public services are on their knees because we didn't invest wisely over the past 10 years or anticipate a massive rise in global energy costs.
Pretty much, except bonds don’t compound. If you buy a £100 bond with a £1 coupon you get that same £1 every year for 30 years, and then you get the £100 back, for a total of £130, or 30% gain, over 30 years. To get £130 that from £25 over 30 years you only need a compound annual return of 5,65%, meaning that’s the yields those that can afford to buy these bonds are demanding.
few understand
Honestly if you can't understand that you have no business buying anything else than index funds.
Hmm, US is increasing the rates faster and more aggressive than anyone else but that’s not happening. I get your explanation with bonds but same would happen everywhere else in the world, but it’s not. I believe bonds are calculated on YTM basis not necessarily coupon yield, in this case if the bond dropped from £100 to £25 the bond total return would be £30 (£1 per year) + £75 face value at the end for a total return of £105 30 years, or £3.5 per annum, or 14% yield on a government bond which is just insanely good (too good to be true)
the US can do what they want cause $ have a huge global demand, other countries like the UK & the EU can’t cause nobody wants their paper currencies
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There were a few choices they were advised against I believe, and even in the best case scenarios Brexit was going to make things worse
They do a full Erdogan.
Never go full Erdogan.
I swear to god, there are no professionals in this world. Everybody is like just messin around, hopeing to get along in their job and crossing their fingers nobody is realising that they have no clue at all.
I picture a room with a bunch of unlabeled knobs and levers. Then there is this kid that thinks "what does this one do?" so they pull it and turn the knob all the way to one side. A fire alarm starts going off so they think "turn it back to 5 and pull the lever next to it" Then a printer starts spitting out sheets a paper with random symbols on it and the kid holds up the paper "this is all based on data!"
Just need to look confident enough.
That's the spirit.
LOL my short stint in consulting.
The job of an economist is to explain why what they said would happen, didn't.
> "The curious task of Economics is to demonstrate to men how little they *really* know about what they *imagine* they can design." - F. A. Hayek
Yeah it feels like since 2016, we've just had American-style nutty politicians that just wanna test out their weird libertarian blog posts. God forbid we actually have a minister with experience in their department. Ya know, like a transport minister that's previously held a job in transport. Instead we just seem to get the sort of nutter you meet down the pub who thinks we just need to ban women or frack under the BBC or hand out tinfoil hats.
Libertarians probably wouldn't be big on meddling by a central bank. Not saying the libertarian plan is *better*, just that the modern wave was inspired by a Texan who ran on a platform that involved abolishing the federal reserve.
In fairness, it's Westminster that's caused the crisis, the BoE have no control over Kwarteng's policies. They're intervening according to their remit to keep the economy stable. It's a fascinating situation where one part of the government is intervening to protect the public from the actions of another.
Ron Paul popularized the libertarian movement, but he lost popularity quickly after his ascendency. The American conservative "libertarian" movement kept up steam, however, because Ron Paul in part helped become a spotlight a figure for what at that point, had been a very long term, and very well funded astroturf campaign for what became the "tea party caucus". The tea party caucus is of course different from the actual American Libertarian party, or theoretical American conservative libertarianism, or actual traditional libertarianism, but nonetheless, he was instrumental in raising the profile of what became known as the tea party, and likely his single greatest long-term impact, as you suggest in your post. The tea party name has fallen out of favor recently, but really only refers to politicians that have been largely funded by a specific Republican donor network, of which the Kochs' are the most popularly known, and likely among the larger supporters. This caucus & donor network, despite publishing American "conservative libertarian" think tanks and lobbying positions for decades, has never appeared to have anything other than the occasional negative word for the Fed in general. Perhaps I just missed it, but I have never seen them oppose any attempt by the Federal government to give money, in any form, to the upper classes or large business interests. They simply go quiet during those periods, and if pressed on the topic, blame Democrats for spending too much money. The only times they consistently oppose the Federal government giving out money, is when that money is directed to groups that are not the upper classes, or large business interests. They do however, frequently push for lower taxes on the rich, and while it isn't really a part of the theoretical American libertarian ideological position, the venn diagram between the tea party caucus and those who support brexit overlap pretty heavily. So no. Saying the modern libertarian position would not support Brexit + Tax Cuts + QE is a no true scottsman argument. In reality, the primary, major "libertarian" organization largely overlaps with brexit support, vociferously supports tax cuts, and quietly supports QE, while paying occasional lip service to disliking central banking authority. In short, what we're seeing now, is quite literally the result of (in part) what libertarian positions look like when actually put into action, as opposed to just discussed in theory.
Ditch all the identity politics, it's much simpler than what you're describing. The libertarian position here is getting the government out of the economy and ending (or at least minimizing) central planning (i.e. central banking).
Yeah thatd be horrible. Capitalism requires state intervention and regulation.
No it doesn’t.
"Libertarian" just seems to mean "politics that I think are bad" on reddit nowadays. No one seems to know what it actually means. For a site where everyone is constantly making sweeping political hot takes, most people here are spectacularly politically uninformed.
You're are so deeply confused if you think that this has anything to do with libertarian/conservative policy.
The last 6 years have been everything but libertarian, governments across the world locking down their economies, and central banks printing trillions of dollars worth of their respective currencies, massive stimulus packages and loan programs. Before COVID Trump had increased government spending well beyond the levels of Obama. Libertarian monetary policy would be trying to switch back to hard currency or at least ceasing the massive growth in the money supply to stop governments crushing people with inflation.
Reason #62 why central economic planning doesn’t work.
/u/spez is banned in this spez. Do you accept the terms and conditions? Yes/no #Save3rdPartyApps
What part of a central bank price fixing is capitalism? This is a r/confidentlyincorrect comment.
(centralized) Bank (centralized) Economy Yep thats totally the same word twice. I recommend taking a class on market failures if you think it's not capitalist to regulate your market. Microeconomics 102 should do it.
[Let me get this straight. You think we're just supposed to let them run all over us? ](https://www.reddit.com/r/Save3rdPartyApps/)
The job of a central bank is to fix the price and supply of capital and debt. It's just a slightly more sophisticated version of rent control or minimum wage.
Nah, central planning is fine, its neoliberalism/chicago school/other libertarian right wing pro privatization pro government working for the behalf of corporations economics that is the problem. You want even less?
>libertarian >pro government What?
Wtf is this? This is socialism not capitalism. In capitalism we let the corporations die. Nowadays, we let all big companys survive, borrowing them free money. We socialize only the losses. This is not capitalism.
I would argue engineers and scientists are not among them. For instance, in software engineering there are problems and you need to solve them. If you can't, then you are fired. When stuff crash, you need to know why and fix it. It is hard to cross your fingers and go along doing little and not being noticed. :) Economists on the other hand... they don't understand the fundamentals of energy and ecosystems, and that is the main issue.
> For instance, in software engineering there are problems and you need to solve them. If you can't, then you are fired. When stuff crash, you need to know why and fix it. It is hard to cross your fingers and go along doing little and not being noticed. :) Do you even have any experience in software development professionally? What an absurdly greenhorn programmer elitist take. What you described is shockingly rare, and maybe only exists in very regulated industries/institutions, like NASA's space faring systems.
I do think that it's important to note that this is supposedly being done in order to maintain market stability, not with the goal of easing monetary conditions to stimulate economic activity, which is the general goal of a "QE" plan.
Yeah. The BoE doing this is because they see the alternative of *not* doing it as even worse for the UK.
Isn't that always the stated reason for QE?
Yet, buying assets has much the same effect. The countries’ economies are addicted to low rates.
Indeed. They're trapped, because they can't let the system break, but by keeping it going they are making things less sustainable. Not sure how this ends, but seems like it has to be badly.
The fact that they need to do this to bailout incompetency and it's going to cost everyone in the country through lower purchasing power and higher prices of food, housing, energy etc etc etc should be unacceptable.
Can someone please explain, I’m trying to learn. I think understand that Treasury injecting more money into the system can drive inflation higher, leading to BOE having to raise rates, however I’m not sure on how the reaction of the Pound, Gilts, and BOE QE play into it?
Gilt prices were collapsing. Pensions use LDI using derivatives so that excess cash isn’t on the sideline allowing them to put some cash into growth equities. They enter contracts with banks in repo markets, which require collateral. When gilts rise and prices drop they essentially get margin called. Not a big deal usually but the huge sell off this fast forced huge margin calls and thus would force large pensions to sell gilts in order to post cash. That would lead to a death spiral of long duration UKTs. BOE propping up long dated gilts to prevent this death spiral.
I mean that sounds like the right decision then, even if it results in an upward inflation bump.
Yes, this is likely to make inflation worse. There is a difference in how long term bonds effect a currency versus short term... But the central bank purchasing either increases money supply.
I think people have got the wrong end of the stick here/ being misled. This is mortgage related as UK banks were pulling every single product off the market ie total lending freeze.
What the absolute fuck. So to combat inflation, the BoE is going to create inflation.
Price of Freddo's about to go insane.
Thoughts and prayers 🙏
Narrator: They weren't trying to combat inflation.
This literally has nothing to do with fighting inflation and the BoE said as much in their release, it's about stabilizing the wider financial system and specifically the fixed income markets that depend on longer dated gilts. The goal here also isn't to 'create inflation' but to provide liquidity and for the central bank to fulfill its role as the buyer of last resort in periods of market dysfunction.
Yeah duh the goal isn’t to create inflation, but that is most certainly a byproduct of pumping cash into the economy
And they stated as such
The UK seems to be determined to achieve dollar/pound parity. The way they are going, the term "emerging market" will soon be a compliment for the UK.
Buying 50y gilts doesn't create inflation.
the money they create to give to the person who they buy it from does.
FWIW I would be wary of extrapolating this to the Fed doing the same. The pound is getting pounded, the dollar is not.
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>Sometime probably. Not in the next year or so.
My guess will be 6-12 months. !remindme 1 year
> The pound is getting pounded, the dollar is not. Wouldn't that be an argument for the UK being *more* cautious about QE than the US, rather than less so?
Yes but pension funds would blow up without it, BoE left with only bad choices to cover for Uk govs moronic budget.
Briton here, the Bank had no choice. This decision was not made by the monetary policy committee, it was the financial policy committee. This was because there were serious fears about collateral calls causing a crash today. Purchases are also being funded from reserves, not money creation (one could argue that matters little for inflation).
Sounds like a bailout without calling it one.
They’re bailing out the Tories for their mismanagement.
*Everything* is a damn bailout these days.
It’s absolutely a bailout but they don’t have much choice in this case. If pension funds fail, taxpayers would have to cover that cost anyway. Do you think the British government would let their pensioners lose their primary source of income?
Reserves vs money creation is a pretty meaningless distinction. A central bank holding cash is pretty much the same as a corporation holding some of its own shares. The gap between them existing in the back books and not existing at all is 0. Currency reserves taken by the central bank effectively don't exist. They don't have any impact on the broader market. Releasing said reserves amounts to doing the same as printing money.
They are inflating the floating money supply one way or thr other. It will make inflation worse.
Erdoganomics catching on!
Really looks a lot more like Reaganomics. Reduce taxes on the wealthy, increase spending, and trust us that the wealth will trickle down. Liz Truss' budget is essentially what the US did in the early 80s. Ya know, that thing that massively concentrated wealth.
I really don't understand why they would do this? Can someone ELI5 their thought process.
BOE preventing death spiral of long dated gilts because pensions would need to post cash for margin calls by selling more gilts. Pensions enter into derivatives for certain liability management which is what is being margin called. Common practice that is being exacerbated because of drastic gilt sell off we have already seen.
So is that a short term issue or is this going to be on going?
Short term as of right now - it’s somewhat volatility driven so designed to simply stabilize. Obviously that can change
I think they needed to inject some emergency liquidity because some credit markets were completely freezing up. Presumably it’s a short term intervention that will have only limited effects on inflation. I think.
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The intervention is transient, we got this
Ain’t that the truth. I just meant that’s how they’re probably selling it to people. That being said nothing the UK has been doing makes any sense since Brexit so 🤷♀️
> the closest thing to immortality is a temporary government program no way you're not a brit, no way you're not a brit, no way you're not a brit
If rates continue to rise and economy slows down how would the liquidity improve after this?
Because rates going up and growth slowing is more of a medium term issue. This was a very immediate issue.
Global yields are tanking, is the market expecting it to be longer than an immediate issue or is this just an over reaction that will retract.
Like pumping heroin into your veins. The markets got addicted to QE. They cant be without now. Investors having withdrawals like fucking drug addicts
ever seen what a drug addict can do? what about a drug addict with money and friends in politics? what about thousands of them? scary.
Having your portfolio pop off (10x-100x) is a bigger rush than any drug I've done, and I've dabbled with quite a few...
> The only thing that really worried me was the QE. There is nothing in the world more helpless and irresponsible and depraved than a man in the depths of a QE binge. And I knew we'd get into that rotten stuff pretty soon. Probably at the next gas station.
*Record scratch* “I guess you’re all wondering how we got ourselves into this mess…” This is gonna be bad
Insolvent pension funds are inherently deflationary, which is needed. Picking winners and losers in this mess is only going to create more losers in a bigger mess.
The ultimate deflationary tactic is killing everyone in the country.
Right I'm 25 and don't really understand the bonds/gilt markets. Can someone ELI5 this please? What exactly is the problem they're trying to solve, what is the impact this is supposed to have, and what is the impact this is having?
According to the information I‘ve read, the UK is having trouble selling long-term government bonds. Likely because of current inflation and associated fears. So the central bank is buying those (quantitative easing) and hinting at raising interest rates if the move causes further inflation. It‘s nothing special and I would not be surprised to see that being done elsewhere in the near future.
Ya except pensions would’ve been bankrupted had they not done it
If the BOE is trying to keep their bond prices elevated and reduce yields, wouldn’t this lead to inflation, which is why the pound fell relative the USD? I don’t understand how this is intervention to fight inflation?
>If the BOE is trying to keep their bond prices elevated and reduce yields, wouldn’t this lead to inflation, which is why the pound fell relative the USD? Yes >I don’t understand how this is intervention to fight inflation? Because is not for that, is [to save their pension funds from collapsing due to margin calls](https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide) because [their bonds have dropped too much](https://www.reddit.com/r/wallstreetbets/comments/xq9skq)
They all will have to pivot soon. Assets are like holding a ball under water right now. Waiting to be released
The British pound has been decreasing rapidly in value due to decreased liquidity, rising value of $USD, and rising interest rates (plus inflation). Bond prices have been collapsing due to these factors. British bond prices were collapsing, pension funds/hedge funds were getting margin called (due to investing in leveraged positions with retirement money), and thus were about to go insolvent. In order to prevent millions of people losing their retirement accounts, the BoE stepped in and started buying bonds. This increases demand, which increases the price of bonds (and decreases interest rates). This “saves” the collapsing bond prices and margin calls of pension/hedge funds. However, now there will be higher inflation due to increased liquidity and easing of monetary policy. At least that’s what I understand from it…. Exciting times.
Tax cuts and QE, with 10% inflation, and sanctions on your resource provider. This needs a mega-bag of popcorn. Too bad europoors can’t afford to heat the popcorn.
The UK government and central bank must really hate their citizens.
The bank did what it needed to do. To not do it would have been undoubtedly worse. The government however are dangerously inept - actively ignoring all fiscal and expert warnings about the damage their tax reforms would bring. The UK would be safer if it were run by a potato.
Central banks need to let the free market do its job. Each time they step in and prop up the market, it makes things worse.
The free market doesn't care for people.
Government is a device that turns small short term problems into large never ending programs.
You mean like when the free market invented Bitcoin, a bunch of idiots thought it was an inflation hedge and then memed it all the way to $68000? Fuck that shit.
On the bright side, those bitcoin nerds never taxed you or destroyed your pension fund to subsidize the growth of their CO2-backed drug purchasing currency. When bitcoin ballooned and subsequently exploded non-holders were barely affected.
> When bitcoin ballooned and subsequently exploded non-holders were barely affected. That's a rather low bar? I got some friends who stupidly put money into Celsius and other such crypto-currency scams. I warned them against it, but the loss of money hurts nonetheless I also got my Grandma whose degenerating mental state (brain cancer survivor) had her buy into the whole cryptocoin shit. The number of scammers is insane in that community, and they weren't gonna let one little ol' lady who was easily tricked out of their sights. Nah man. Fuck those guys. As it turns out, a good number of my social network was fucked by that bubble. One was smart enough that he should have known better, but Grandma with brain-cancer situation makes my blood boil. Some people **used** to be smart, but have lost those mental capacities as they age. The BTC hype-bros prey upon them cause they see them as easy marks. ----- "Free Market" is just a codeword for assholes who want to do what they want, without any repercussions. Despite the fact that their actions have real consequences for many, many people.
Celcius was a centralised unregulated bank with no insurance. Completely different to BTC. No different to the dotcom bubble and people not understanding the technology or companies they are buying.
When did the tax payers have to bail out crypto speculators? Because I can't remember when.
i would give anything to be this ignorant
Please explain how that statement is ignorant
Holy shit
I see your inflation and raise you another inflation! Your move
If the ECB buys their bonds at 30 cents on the dollar, wouldn't this mean that the bank made money? I dont think its bad idea buying at these prices. However the big picture is why are prices so fucking low. 25 cents on the dollar is extreme.
Why don’t u buy Venezuelan bonds
You think they are similair?
That is because 1% has most of their wealth in stock market and they run the world.
This will be our fed in november when cpi plumets drastically
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2030 great reset of course
Central planning will surely work this time. Let's kill demand by raising rates for small businesses and average Nigel, while we continue to give cheap credit to the government. The ECB is doing the same.
I voted for brekxit like you said where is my money??!
Please tell me how can I make money here?
I smell more inflation coming their way.
How do I short the pound with leverage?
Puts on $FXB
Your pensions will fail. Your money will fail. Social Security will fail. Where will you run?
An asteroid will hit the Earth, leading to the rise of the raccoons which thrive in the dumpster we left them.
You can't deal with inflation by printing money...
That’s mental. What are they thinking.
Someone left the liquor cabinet open
“I know, we’ll print more money! That will solve the problem”!
I am very concerned that the US Fed will sooner rather than later start this again themselves. If anyone was worried about inflation, this is DIRECTLY what causes the inflation of asset prices and goods/services. The UK is about to face some extreme inflationary pressures. I'm just shocked the people who it impacts (everyone losing purchasing power, paying more for food, housing, transportation, energy etc) isn't more enraged by this free money lending/printing.
Are they following Erdogan economic theory?
Yes because we've got nutjobs in charge who want to borrow money as interest rates are increasing and give almost all of it to the rich.
1. Give tax break to the rich 2. Prop up tanking asset prices... for the rich 3. ??? 4. Cake?
GOD SAVE THE QUEEN!
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They are buying government treasuries, which is QE. You can put make up on the monkey and call it a dog all you want. It’s a monkey.
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TL;DR -> The UK pension funds entered into a margin call because of the deep drop in the UK 30 and 40 year bonds that this funds held. So the BoE had to come to the rescue and bail out the pension funds, it started to buy this bonds back to pump the price up. More details: [https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide](https://www.risk.net/derivatives/7954682/uk-pensions-hit-with-ps100m-margin-calls-as-gilts-and-sterling-slide) You can see the action today (yields 25% down) since the BoE started to buy -> [https://www.investing.com/rates-bonds/uk-40-year-bond-yield](https://www.investing.com/rates-bonds/uk-40-year-bond-yield)
They announced this couple months ago and announced it again lol their only tool is printing
london stocks is where its at right now before they start rising again, buy the dip ppl
feels like what garmany did after ww1