Retarded question

[meanreversion]

Good thread.

From memory, I recall reading that the index linked component of gilts was around a third, certainly higher than most countries, BUT the duration of the debt is far longer than, say, Portugal.

Let's be honest, the main reason gilt yields haven't gone through the roof is because we own our currency and can print as we see fit. As far as the Coalition "cuts" go... spending is still running at an all time record, so they haven't even started, although clearly that does assist market sentiment.

I also sense that this country is now resigned to declining standards of living. This may be partly driven by politicians and bankers (Merv - fastest decline in living standards), but I think also that we're a fairly pragmatic country, unlike, say, the States.

So we have inflation running around 2% above wage settlements.. we know we're getting poorer but we're being told to accept it. How much longer we acquiesce in this, is another matter. The state still consumes far too much of national income, as does the EU (and foreign aid).

 

[scose-no-doubt]

I read somewhere that wages have started to rise. Hope the unions get together start to undo Merv's work as they wage war on the IOD. Unforeseen lulz.

As for QE I always assumed they would mature, money would be deposited and withdrawn from the system by way of settling the credits on the BOE balance sheet as and when they thought appropriate. I thought it would go back into the infinite void.

What are the benefits of dealing with unwinding the asset purchases in a way other than maturity?

 

[meanreversion]

That's a good question. The Fed is now the #1 holder of Treasuries. What is to be gained from them announcing they're about to start selling them? It's not as though there's a shortage of Treasuries such that the market needs replenishing. The only advantage I can see is if interest rates needed to rise quickly in a demand-pull inflation environment, but we're miles from that at the moment.

 

[Pazienza]

Good thread.

From memory, I recall reading that the index linked component of gilts was around a third, certainly higher than most countries

Correct.

 

[Martinghoul]

What are the benefits of dealing with unwinding the asset purchases in a way other than maturity?

The benefit is that you won't be accused of monetizing debt.

 

[glyder]

The BOE doesn't actually have to state that it's uniwning QE, does it?

I remember reading the BoE had its rules changed, aside from QE, it no longer need publish / disclose if it is printing more (and more and more) cash.

 

[cr6196]

what happened when the BoJ reversed their QE in the mid 00s...if i remember right, they just swapped their Y20b or so of bonds for excess reserves overnight and that was that...obv its not the same here but how much of QE went into the economy? from what i can work out (looking at net corp lending), not that much...

 

[Martinghoul]

what happened when the BoJ reversed their QE in the mid 00s...if i remember right, they just swapped their Y20b or so of bonds for excess reserves overnight and that was that...obv its not the same here but how much of QE went into the economy? from what i can work out (looking at net corp lending), not that much...

You can't really swap your bonds for excess reserves...

I remember reading the BoE had its rules changed, aside from QE, it no longer need publish / disclose if it is printing more (and more and more) cash.

This isn't right.

 

[cr6196]

You can't really swap your bonds for excess reserves...

This isn't right.

right to rephrase it...the BOJ swapped the bonds they held for the money banks had on deposit with the BOJ, altho i may have misremembered it...my point is that taking out probablly wont do a lot of damage if loan demand is/has been weak, which in itself is probablly questionable but something i think may be broadly true.

 

[Martinghoul]

right to rephrase it...the BOJ swapped the bonds they held for the money banks had on deposit with the BOJ, altho i may have misremembered it...my point is that taking out probablly wont do a lot of damage if loan demand is/has been weak, which in itself is probablly questionable but something i think may be broadly true.

Yeah, what you may be referring to is the stuff that the Fed is looking at and what the ECB is doing already. Basically, they use their repo facilities to drain the reserves from the mkt. That's certainly possible, but I don't think the BoE would do this, for, primarily, political reasons.

 

[cr6196]

this explains it somewhat...http://www.imf.org/external/pubs/ft/wp/2010/wp10114.pdf

it appears they knew how they were going to get out before they got in so it may not be a useful comparison

 

[Martinghoul]

this explains it somewhat...http://www.imf.org/external/pubs/ft/wp/2010/wp10114.pdf

it appears they knew how they were going to get out before they got in so it may not be a useful comparison

Thx for the paper... All the CBs think they know well in advance how they're gonna exit. Whether what they think actually materializes is another question. I'd argue that the BoE knows that their exit is through selling and that's what they've been assuming all along.

 

[Atilla]

The BOE doesn't actually have to state that it's uniwning QE, does it?

Markets watch every word these Big Bank Chiefs use to describe the state of the nations balances.

Markets also do not like surprises. It would be a very grave mistake imho for the Bank to keep a lid on any such moves.

I would make the point that it is in the Bank interest to be as transparent and credible in its announcements - about the economy, as possible if it wishes to yield an effective monetary policy.

 

[Pento]

I would agree with Martinghoul here. The BoE is much more likely to sell the assets back to the market than let them expire. I think I remember this being mentioned as the final intended exit strategy when they first started the whole QE programme in the UK.

In regards to the order of monetary squeezing, I see the QE sales first then followed by rate hikes. The sale of the assets will have the desired effect of a rate hike without the actual implementation of the rate hike. Same as happened when QE started and yields plummeted without any more rate cuts. This allows the BoE some time monitor the effects of the QE sales and also gives a clear indication to the market that monetary squeezing is on the way without the shock of a rate hike. This will allow the market to prepare for the coming rate hiking cycle. All depends on whether the BoE wants to be nice like the ECB and communicate well or just fancies shocking everyone.

The QE sales could be hinted at during the BoE minutes or more likely just on rate announcement day as usual when they announce (recently) no change in the APF.

 

[Pento]

BoE King today said they would hike rates first and then sell the QE package back to the market.

 

[scose-no-doubt]

Won't that reduce the value of the bonds they're holding.

 

[Pento]

Yeh I guess it will when we are closer to the time of them actually doing it. Reversal of QE will lead to moves the opposite way to when they first started QE.

 

[scose-no-doubt]

wtf will happen to the curve?

 

[Atilla]

wtf will happen to the curve?

It depends on how it is calculated but normally would be based on government benchmark bond yields.

So one would expect rates / yields to rise and bond prices to fall. Thus - curve should rise.

 

[Martinghoul]

wtf will happen to the curve?

Oh, all sorts of fun stuff...