Trussed Up Like A Turkey

UK Prime Minister Liz Truss has had a very, very bad start to her government, you know with the Queen dying and the power crisis and oh yeah, nearly collapsing the pound this week with her new tax cut scheme.

The Bank of England took emergency action on Wednesday to avoid a meltdown in the UK pensions sector, unleashing a £65bn bond-buying programme to stem a crisis in government debt markets. 

 

The central bank warned of a “material risk to UK financial stability” from turmoil in the gilts market, which was sparked by chancellor Kwasi Kwarteng’s tax cuts and borrowing plan last week. 

 

 The BoE suspended a programme to sell gilts — part of an effort to get surging inflation under control — and instead pledged to buy long-dated bonds at a rate of up to £5bn a day for the next 13 weekdays.

 

Economists warned that the injection of billions of pounds of newly minted money into the economy could fuel inflation. “This move will be inflationary at a time of already high inflation,” said Daniel Mahoney, UK economist at Handelsbanken. 

 

UK government bond markets recovered sharply after the announcement. The pound rose by 1.4 per cent on the day by evening trading in London, reaching $1.0877 against the dollar.

 

The bank stressed it was not seeking to lower long-term government borrowing costs. Instead it sought to buy time to prevent a vicious circle in which pension funds have to sell gilts immediately to meet demands for cash from their creditors.

 

That process had put pension funds at risk of insolvency, because the mass sell-offs pushed down further the price of gilts held by funds as assets, requiring them to stump up even more cash.

 

 “At some point this morning I was worried this was the beginning of the end,” said a senior London-based banker, adding that at one point on Wednesday morning there were no buyers of long-dated UK gilts. “It was not quite a Lehman moment. But it got close.” 

 

 The most directly affected groups were final salary pension schemes that have hedged to ensure their ability to make future payments — so-called liability-driven investment strategies that are very sensitive to fast-moving gilt yields. 

 

“It appears that some players in the market ran out of collateral and dumped gilts,” said Peter Harrison, chief executive of Schroders, which has $55bn in global LDI business. “We were more conservatively positioned and we had enough collateral to meet all of our margin calls.” 

 

But a senior executive at a large asset manager said they had contacted the BoE on Tuesday warning that it needed “to intervene in the market otherwise it will seize up” — but the bank failed to act until Wednesday. It declined to comment. 

So yes, the UK bond market almost folded in on itself because the merry idiots in the Tory party decided a massive tax cut that would starve the government's income so they could borrow the rest would fix things. It fixed them, alright. Into the ground.

We'll see where this goes, but I can't imagine the misery for British citizens because of this mess endearing everyone to the Tories for much longer. Liz Truss's government may be one of the shortest in UK history.