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The market for British bonds, or gilts, used to finance government borrowing, is one of the least understood parts of the country’s financial architecture.
A temporary harsh light was shed on gilts during Liz Truss’s short stay in Downing Street, when her tax cut caused market interest rates to rise and sent shockwaves cascading through the Kingdom’s pension funds. United.
Asset managers recklessly attempted to boost returns by using liability-based investing, a type of derivative, turning the safest holdings into ticking time bombs.
That experience, which required the Bank of England to come to the rescue of the nation’s pension funds, is deeply embedded in the Treasury’s psyche.
It is one of the reasons why there is so much fear of questioning the wisdom of the Office for Budget Responsibility (OBR).
Debt burden: The Bank of England’s bond-buying spree, or quantitative easing, began with the Great Financial Crisis, but did not end until new inflation came into view in 2021.
Defying the OBR could potentially foment a revolt among ‘bond vigilantes’. These specialized traders seek to exploit the fiscal laxity of sovereign governments.
Three successive shocks since the millennium – the great financial crisis, the pandemic and Russia’s war against Ukraine – have seen the UK’s debt and borrowing rise.
The magnitude of the task has placed the Debt Management Office (DMO), an obscure branch of the Treasury, on the front line of policy.
Students of debt markets turn to Schedule A of the ‘red book’ on Budget day to understand how much new money needs to be raised to keep the show going.
Net funding needs in the year ending 5 April were put at £246.1bn in the autumn statement. It projects an additional £276.9 billion will be needed in 2024-25.
A newly published report by the Public Accounts Committee (PAC) scathingly criticizes the way debt markets are managed. He wants to see better oversight to detect illegal activity.
Competition regulators uncovered the illegal sharing of confidential information by five leading banks in the period 2009-2013, when debt soared after the bailout of the financial system.
The PAC wants to see more information about who really owns Britain’s debt.
Despite the negativity about the UK filling the airwaves, foreigners actually trust Britain and own around 25 per cent of our debt. That is the highest level in the G7 apart from France. The scale of foreign ownership is a risk factor.
The political and economic chaos could potentially trigger a run on gilts by foreign owners that would send yields, bond yields, soaring and disrupt bond auction plans.
The report also highlights the growing challenge for the DMO as it unloads more and more bonds.
This at the same time that the Bank of England is a net seller of bonds (£100 billion is planned for this year), as it unwinds its holdings of £875 billion.
The Bank’s bond-buying spree, or quantitative easing (QE), began with the Great Financial Crisis, but did not end until new inflation came into view in 2021.
The composition of the UK’s debt has two unusual features.
On the positive front, the maturity (the period of time the money is borrowed) at 14 years is the longest in the G7.
This is more than double that of the United States in six years and should act as a source of stability and ensure some lower interest rates.
The big error in judgment, exposed during the recent period of rising prices, was the decision to issue 25 percent of our debt in inflation-linked bonds.
As the cost of living soared in 2021-22, the debt service burden increased. This limited the flexibility of successive Chancellors.
It is one of the key reasons why public services have been starved of resources and individual and corporate taxes have increased to record levels.
It is difficult to establish responsibility for a huge mistake.
Suffice it to say that the great accumulation of indexed government securities occurred when George Osborne was Chancellor.
There was a widespread belief that the demon of inflation had been killed. How wrong you can be.