So says Bank of England deputy governor Charles Bean:
Mr Bean said Bank research “suggests gilt yields are lower as a result of the programme by a total of around one percentage point.” The comment is significant since the Bank has been reluctant thus far to quantify the impact on government borrowing costs.
If the scale of the fall was reversed when QE was unwound, it could mean that by 2014-15 more than 10p in every pound paid by the British taxpayer would be used to pay the Government’s debt costs, based on figures from the Institute for Fiscal Studies (IFS).
With yields already on the rise due to fears surrounding the public finances, Mr Bean’s comments underline risks surrounding the end of QE.
I know I’m a stuck record, but I wouldn’t touch gilts with a barge pole right now.
(Source: The Telegraph)
{ 3 comments… read them below or add one }
Next week: BoE governor announces that the Pope may indeed be Catholic.
10Y gilt yield at 3.95% and, remarkably… falling
So I feel the need to make a bullish case for gilts, since no other bugger does, even if I don’t particularly believe in it myself:
1. no double-dip recession
2. economy recovers well or moderately well
3. next parliament trims public spending without causing public sector unions to blow up
4. UK zombie banks recover and govt sells off their equity stakes at a good profit
5. govt borrowing is able to drop from (3) and (4)
6. demand for gilts remains from
a) pension funds due to ageing population
b) other financial institutions due to new era of prudence and higher capital ratios
c) foreign investors due to cheap pound
d) domestic investors losing their equity addiction after last few market crashes and diversifying
7. BoE able to sell off their gilts very gradually, from maybe 2011/2012-onwards
It’ll be a walk in the park, right?
Thanks for that Lemondy! As you know I’m bearish, but you might add the decline in Sterling reversing to your list of potential positives. As your stats showed the other day, most buying is domestic – perhaps if people overseas the Pound was strengthening they’d look again at Gilts? I don’t see why the pound should fall massively further from here, at the least.
The Lloyds news today (just posted) must also be positive.
On the other hand, I’m not sure the economy recovering is good for gilts? I’d worry about inflation and rising rates in that scenario. (Would get rid of any lingering default or downgrade risks, I suppose, if anyone was barmy enough to think a default on gilts was remotely probable!)
Yup, inflation risk is there of course… the positive would be improving tax revenues and a decreasing welfare bill.
Amazing news for LLOY, didn’t expect that so soon.