UK 30-Year Yield Tops 5%, Pound Jumps as Confusion Grips Market
Comment of the Day

October 12 2022

Commentary by Eoin Treacy

UK 30-Year Yield Tops 5%, Pound Jumps as Confusion Grips Market

This article from Bloomberg may be of interest to subscribers. Here is a section:

“Bailey’s words did sound harsh but from the BOE’s perspective they need to sound stern,” said Pooja Kumra, rates strategist at Toronto-Dominion Bank. “The BOE has been very receptive to markets. If chaos continues we doubt that they will run away.”

Eoin Treacy's view

The Bank of England is in a very difficult position. They desperately need to act against inflationary pressures but are constrained from using the tools at their disposal because of the risk posed by leverage in the financial system, not least in the pension sector.

That leaves room only for making bold statements and no follow through. On Monday the Bank of England included corporate bonds in its purchase program. On Tuesday, they included inflation-linked bonds. The statement on Tuesday evening needs to be measured against their actions and not least because the BoE bought even more bonds today.  

The biggest issue is the Bank of England runs the real risk of losing all credibility if they do not act. They simply cannot have it both ways. It is impossible to do both quantitative easing and quantitative tightening at the same time. Faced with the choice of rescuing the ailing pension system and fighting inflation they have to fight the near-term emergency first and kick the long-term inflationary problem down the road.

Pension system leverage has been building up for years without causing even a whisper of dissent from regulators. Now that it has imploded, we are supposed to be surprised. This is a perfect example of how financial sector regulation is about box ticking and virtue signaling rather than addressing clear risks in the system.

Allowing unleveraged pensions to drive a cart and horse through the prohibition on leverage is a failing in the system that masked the real problem of funding pension obligations out of whack with what can be delivered with the assets on hand. There is no easy answer to solving that particular riddle, Either someone will have to pay and/or disbursements will be curtailed. For now, companies are being called upon to contribute more funds to their pension funds.
The Pound recouped yesterday’s decline today because the prospect of BoE intervention avoids the potential for a bond market crash.

It’s time for the Truss administration to accept conventional reality. This is no time for an unfunded stimulus package. Perhaps she will do the honourable thing and resign quickly.  

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