I don’t want to be on the wrong side of the IMF – and this lady!
It is good to learn about capital markets from a friendly expert and that’s how I regard Toby Nangle. Here he is explaining bonds and how the UK is being treated.
The question of how solvent the UK is , is one that interests me , so I have been following the markets on a daily basis since this time three years ago when Liz Truss was in charge.
Here’s how it went
Those yields make a lot of difference to things like pension valuations and (by proxy with Swaps) annuities. I want to know an answer to this question not just for pensions but for the country that sponsors my future (via the state pension).
As we can see, we hit a new high in the middle of the week and now we’re back in better regard than we were (as a country) on Monday. You get that put another way by Toby
“Pixel Time” is the time of going to press, I didn’t know that but it applies to this blog. it’s measured in minutes from starting to write!
It is even quicker with “snip time” which allows me to learn and blog as I go along. I don’t read the blue press – top shelf stuff if I bought papers – along with other material material! Here’s why I stick with Toby..
I am now at such a state of excitement that I struggle to scroll on – what is our fate – the market will tell us and the FT will tell interpret
Unfortunately, there follow a couple of charts which require a knowledge and perception which I don’t have, I just know that being in the middle is ok
If Canada is worse than us, I’m ok, even if we’re not keeping up with the Italian dodge pots.
This one tells me that we’re less in debt (mortgaged) than any of our compatriots other than the Germans (who are far too sensible to worry about).
This “debt metric” is what I’d call the mortgage payments and even if we roll them up, (like most people with life time mortgages, I’m ok so long as the rates stay down), Britain will be ok so long as it keeps Gilt yields down – or vice versa as Tony points out.
But , if I’m reading Bloomberg and FT right and if Toby hasn’t confused my pathetic brain, we are right in the middle and really shouldn’t be worried about getting bailed out by the IMF like we were when I was a teenager.
I think I take comfort in these words that Toby tell me are from Neil Shearing, group chief economist at Capital Economics.
That’s how I get my economics dished up. Thanks Toby – keep it coming.
I don’t usually get involved in Macro-Economic debates but triggered by a Daily Telegraph article (possibly one of those your referred to ). I have been discussing Gilts crises with one of my friends. I believe we are over-excited about market reactions.
From the Nation’s point of view changes in Gilt yields only affect new Gilts being issued (both to cover current Government borrowing and the replacement of maturing debt). So short term movements should have a negligible impact, such as the market reaction to a Government announcement, as they will only affect a tiny proportion of total Gilt issuance.
Since 2003 the proportion of UK Gilts held by overseas investors has fallen from nearly70% to around 20% in 2023. The majority of Gilts are held by participants in the Market whose Gilt holdings are being held to meet legislative or regulatory purposes (the Bank of England and pension schemes and insurers) and who are therefore market takers and not market makers. In the case of pension schemes and insurers their fundamental purpose in holding bonds including gilts is to receive the annual interest and redemption proceeds at the scheduled time.
It is legislative and regulatory framework affecting pension schemes and insurers (holding about 30% of total gilts) that converts that long term purpose into a market “crisis”. These I identified as:
1. The introduction and continuation of quantitative easing to support financial institutions after the 2008 financial crisis without enough consideration of the likely consequences on future markets – e.g. should the banks have been recapitalised more quickly rather than relying on continuing central bank support.
2. The setting of mandatory “solvency” tests for pension schemes based entirely on historic measures of gilt yields with no consideration of their likely application in the future.
3. To meet 2., pensions schemes borrowing from future income to enter into hedging contracts to match gilts prices, especially in times when it was abundantly clear that gilts were already over-priced with substantial negative real yields. This process is illegal for local authorities in the UK and would have been for pension schemes had we remained in the EU.
I think as a Nation we should address these issues as an early priority and address the fundamental issues starting first with the pension scheme legislative and regulatory environment. At present it seems the direction is to put all the pension income risks onto the individual and then to increase those risks by seeking to limit the individual’s freedom to manage those risks by the mandatory pooling of investments to permit investment policies determined by politicians based on their beliefs.
If current pension policy trends appear to shift all investment and longevity risks from institutions to individuals, while simultaneously constraining individuals’ ability to manage these risks through mandatory participation in collective investment schemes governed by politically-driven investment decisions.Then this shift represents a fundamental contradiction in pension policy design. By transferring risks to individuals while restricting their control, it creates several problematic outcomes:
1Individuals bear the full consequences of market volatility and poor investment performance but lack meaningful input into investment strategies. This can lead to inadequate retirement savings despite a lifetime of contributions, particularly affecting those who retire during market downturns.
When politicians rather than financial professionals or individual choice drive investment decisions, pension funds may become vehicles for political agendas rather than retirement security. Investment strategies might prioritize ideological goals over returns, potentially reducing long-term performance.
Traditional pension design balanced risk-sharing between employers, governments, and individuals. This new model concentrates risk on those least equipped to bear it while removing their ability to diversify or adjust strategies based on personal circumstances.
Political investment mandates may benefit current political priorities at the expense of future retirees, creating potential conflicts between present policy objectives and long-term retirement security.
The fundamental tension here is between collective action (which can achieve economies of scale) and individual autonomy in financial decision-making. The current approach appears to capture the disadvantages of both systems while minimizing their respective benefits.
The confiscation of surplus assets envisaged with IHT could easily be applied in future to DB surpluses.
Government haven’t mandated investment styles yet though. And they’ve not mentioned touching SIPPs?
And even if there was a mandate on SIPP, you could offset the overweight UK on a chunk, by overweight ex-UK with the remainder.
My concern with this analysis is that it’s today. The whole concern isn’t that it’s ok *today*, it’s that the government aren’t doing a good job of growing the economy, instead adding debt, uncertainty, which increases debt to gdp and inflation, and that simply means gilt owners and buyers are losing money unless they ask for a higher return.
As I see it, things won’t be ok unless government stop spending money on economic negative multipliers.
In this case, higher taxes and not spending it on things that generate economic growth.