Effects of Quantitive Easing on......

[the blades]

........corporarte bonds.

Any idea?

I understand that if the government goes down this route it effectively "transfers assetts" by "buying up debt".

Does anyone have any insight, or know where to look, for information on how QE would effect corporate bond prices? My take in that it would be positive for bond prices, am I correct?

Cheers,
UTB

 

[Jack o'Clubs]

Not necessarily. The main impact from a fixed income perspective is on government treasuries, but corp bond prices could fall (ie yields rise) if the fear is that QE unleashes inflation.

 

[the blades]

Not necessarily. The main impact from a fixed income perspective is on government treasuries, but corp bond prices could fall (ie yields rise) if the fear is that QE unleashes inflation.

thanks for that JOC.

Wouldn't that have the effect of pushing down yields on government bonds still further? There's now a huge gap between government and corporate yields, no doubt reflecting the default risk. At some point, and if the effect of any stimulus is to brighten the outlook for UK PLC, can't we expect the default risk to fall (and prices rise) in advance of any threat of inflation?

I hope the above doesn't make it sound like I know what I'm talking about, because I don't:smart:

UTB

 

[Jack o'Clubs]

Difficult to say as its hard to disaggregate what the prices are currently discounting - I don't think anyone knows to be honest. On government debt, a lot will depend on whether the US starts buying treasuries as they've hinted they might. I do think corporate bonds are very cheap at the moment - I've been buying some through bond funds.

 

[the blades]

I do think corporate bonds are very cheap at the moment - I've been buying some through bond funds.

me too. Which ones, if you don't mind me asking?

I'm building up holdings in;

Fidelity Moneybuilder
Invesco corporate bond
M&G Optimal income
Investec Sterling Bond
Templeton strategic bond
Baring directional global bond

UTB

 

[Jack o'Clubs]

Your Invesco one, plus Aegon Investment Grade Bond and Baillie Gifford Investment Grade Bond

 

[the blades]

Your Invesco one, plus Aegon Investment Grade Bond and Baillie Gifford Investment Grade Bond

LOL -I'm also holding the Aegon fund, and I forgot!

Another question - do you know if any of your funds hedge against currency movements? It seems most of the funds have a max of around 65% UK exposure. Do they hedge the foreign stuff? (not talking about the strategic stuff where they're trying to profit from currency movements)

UTB

 

[Jack o'Clubs]

The Aegon fund 'hedges back to sterling a minimum 80% of the fund', so I guess that gives them flexibility to take a small currency bet if they wish to.

The Baillie Gifford fund is sterling only, and Invesco hedge out all forex exposure.

 

[everyonerich]

1st question is government doing this for profit or the opposite?

 

[blancspa]

Quantitative easing

I have run across a book "Credit Crunch" by Graham Turner (2007).
He worked in Japanese banking industry for abut 20 years. Japanese quantitative easing started in late 1990s, with the effects described in the book.
Can`t remeber the impact on corp bonds prices or yield, but i suggest to take an insight into Japanese bond prices indexes after japanese gov intervened.

best regards

 

[Martinghoul]

Stephen King sums up the uncertainty nicely here:
Stephen King: The policy to print money is right but we must be told how it works - Stephen King, Business Comment - The Independent

 

[Glenn]

1st question is government doing this for profit or the opposite?

I read last week that they expect to lose about £150m from the £75bn input.
If you do the numbers this suggests that they will stay in until the gilts expire, i.e. the dividends will pay back most of the investment.
Not sure how inflation (or deflation) figures in that though. Perhaps they aren't either !
Glenn

 

[london88]

This is nothing more than pure CREDIT EXPANSION. The benefit is 0. In the longterm there will be another crash and another wave of credit to help pay for the ridiculous debt levels that we have. This debt needs serviced.

If you are already in debt how can you service it? Print more money in the ST?

Do we not need to rethink the fundamentals underlying our greed?

 

[Xeno]

It's an expansion, but credit has massively contracted.

I heard rumours they may buy up corporate bonds, which would be good for them.

As to the infaltion question - I saw two economists completely divided and arguing with each other on that. It seems pretty clear to me that no one can say since no one knows who much money will be written off, and how much QE will take place.

I would say that IMO the hole created by the crunch/recession is already, and will turn out to be even bigger than all the mooted QE. I imagine they'll carry on QE-ing until they get some sort of effects. Unfortunately I don't see much clever lending being done in this climate. I think people still underestimate the scale, and inflation is a long way off.

 

[Martinghoul]

They have, in fact, promised up to £50bn of corp bond purchases...

 

[london88]

I think people still underestimate the scale, and inflation is a long way off.

Do you think it is possible that inflation will pick up faster if others follow. Demand in commodities, excluding oil, will reach the levels we saw last summer and then we will be no better off.

 

[blancspa]

maybe in the long term
the time to react is now to avoid massive correction
but BofE has to spend money on new businesses or businesses with prospects, not just buying up everything blindly. I am not sure if they do this right, but who knows.

They should have separated the rotten firms to avoid contagion in the first place, yet there is no agreement amongs diffrent political views as usual, so in practice all looks f***d up a the moment. I guess conservative liberalism hasnt done much good to the people at the bottom of the ladder, invisible hand? Could be cruel fist of destruction.

 

[london88]

If that is the case then why does the Governement not undertake infrastructural projects to rejuvenate some out dated technology in the country. Railways, underground, broadband etc... I know some of these are already underway but a lot more could be done. Take the facists of Italy and Germany; they recovered after WWI and the Great Depression with massive projects. Italy built motorways, drained large areas etc...

Just an idea... taking the train from London to Edinburgh makes you think in a strange way!

 

[blancspa]

If that is the case then why does the Governement not undertake infrastructural projects to rejuvenate some out dated technology in the country. Railways, underground, broadband etc... I know some of these are already underway but a lot more could be done. Take the facists of Italy and Germany; they recovered after WWI and the Great Depression with massive projects. Italy built motorways, drained large areas etc...

Just an idea... taking the train from London to Edinburgh makes you think in a strange way!

------------------------------------------

Seems that you gov is pretty rubbish though. The prime minister - 14 years investment banker cant figure out cyclical movement of capitalistic economies.
And why they dont pump money in the rejuvanation of the projects - cos they dont have them, there is nowhere to borrow, thats why they print them. Even worst they have stopped subsidising green energy projects, going back to fussils and nuclear power.
Looks bad, check the UK macro figure - looking much worst than the US and EU.
Sorry

 

[Martinghoul]

If that is the case then why does the Governement not undertake infrastructural projects to rejuvenate some out dated technology in the country. Railways, underground, broadband etc... I know some of these are already underway but a lot more could be done. Take the facists of Italy and Germany; they recovered after WWI and the Great Depression with massive projects. Italy built motorways, drained large areas etc...

Just an idea... taking the train from London to Edinburgh makes you think in a strange way!

They used to do all sorts of things like that, using off-balance sheet vehicles (PFI). Unfortunately, the banking shock caused the whole PFI system to get completely disrupted in a whole variety of ways. So public infrastructure projects languish 'cause the normal methods of financing them are broken. Until they can fix the banks, nothing can proceed, in my view.