British economists are currently divided between:
- The optimists: Those who believe we can happily borrow hundreds of billions a year without consequence.
- The inflationists: Those who are already polishing their wheelbarrow ready for shifting thousands of bundles of worthless tenners to Tesco to buy a loaf of bread in a couple of years time.
I exaggerate, but only a bit. Just ask The Telegraph’s Liam Halligan who says:
The Bank’s inflation forecast assumes a lot – not least the stabilisation of commodity prices and that a weakening pound doesn’t further raise import prices. I think both assumptions are wrong. As the market grows ever more concerned not only about the vast scale of the UK’s debt issuance but that inflation and/or sterling depreciation will erode the value of that debt, a fully-blown gilts strike looms larger. Such an outcome would be disastrous, causing chaos as the public sector’s bills went unpaid. Britain’s financial reputation would be destroyed for a generation.
I humbly concur. Who is buying gilts right now? Not even the Bank of England…
{ 2 comments… read them below or add one }
Hello Mr Tickle! The DMO can help answer the question, conveniently. On a gilt auction this week:
“The domestic investor base provided the main support for the issue, taking around 97% of the
allocation. There was again strong direct interest from end investors, primarily fund managers,
pension funds and insurance companies.”
– http://www.dmo.gov.uk/documentview.aspx?docName=/gilts/press/pr230210c.pdf
I was struck by the Barclays results this week which said they had upwards of £100Bn in their capital reserves/liquidity buffer – presuming that’s mostly gilts, that’s upwards of 10% of the entire gilt issuance!
Personally, I am still buying gilts as an insurance policy, keeping my portfolio at around 10-15% in gilts, half of which in linkers at the moment. I haven’t looked at it systematically, but from anecdotal portfolio watching, gilt valuations seem to be mostly negatively correlated with equity markets still, which is exactly what I want.
Thanks for that Lemondy (and for popping over!)
Given the weak pound, that 97% of investors are still domestic would seem to tell a story (although I have no idea if Gilts are every bought by overseas investors much these days). Presumably it’s banks as you say with Barclays (staggering – see the post elsewhere on Stock Tickle about reserve excesses in the US) as well as pension funds forced to buy them.
Impressed with you sticking to your guns on gilts. I suspect you’ll find that negative correlation still holds true in the next few years…we’re both positioned for that!