BOE is caught between 10% inflation it needs to crack down on with rate hikes & QT and a crisis over derivatives that leveraged UK pension funds blew their brains out with.
By Wolf Richter for WOLF STREET.
The Bank of England announced on September 28 that it would buy up to £5 billion per day in long-dated government bonds “to help restore market functioning and reduce any risks from contagion.” This was hugely ballyhooed as a “pivot” on the internet and in the US financial media. Yesterday it came out with an even more hugely ballyhooed announcement that it would double its potential bond purchases to £10 billion per day for the rest of the week. And today, it came out with an even more hugely ballyhooed announcement that it would “expand” the bond purchases. Throughout it maintained that it would “cease all gilt purchases” on Friday, October 14.
And yet, despite all the hoopla, the BOE has actually bought just a small fraction of the bonds that it said it might buy. In total, since September 28, the were 8 days of “up to £5 billion” per day in purchases and 2 days of “up to £10 billion” per day, for a total of £60 billion.
And yet… through today, it purchased only £7.2 billion in total over the entire 10-day period, with four days of zero or near-zero purchases. It purchased only 12% of the amounts it said it might purchase.
The chart shows the huge and growing gap between its cumulative purchases (red line) and its cumulative announced potential purchases (green line). The actual purchases were in effect minimal so far:
The BOE is caught between 10% inflation it needs to crack down on with big rate hikes and lots of QT and a crisis over derivatives that leveraged UK pension funds blew their brains out with.
The relatively puny amounts of actual purchases show that the BOE is trying to calm the waters around the gilts market enough to give the pension funds some time to unwind in a more or less orderly manner whatever portion of the £1 trillion in “liability driven investment” (LDI) funds they cannot maintain.
The small scale of the intervention also shows that the BOE is not too upset with the gilts yields that rose sharply in the run-up to the crisis, triggering the pension crisis, and have roughly remained at those levels. The 10-year gilt yield today at 4.44% was roughly unchanged from yesterday and just below the September 27 spike peak.
And it makes sense to have these kinds of yields in the UK, and it would make sense for these yields to be much higher, given that inflation has spiked to 10%, and yields have not kept up with it, nor have they caught up with it. And to fight this raging inflation, the BOE will need to maneuver those yields far higher still:
So today, BOE Governor Andrew Bailey, speaking at the Institute of International Finance annual meeting in Washington D.C., warned these pension fund managers that the BOE will only provide this level of support, however little it may be, through the end of the week, to smoothen the gilt market and give the pension funds a chance to unwind in a more or less orderly manner the portions of their LDI funds that they cannot maintain.
“My message to the funds involved and all the firms is you’ve got three days left now,” he said “You’ve got to get this done.”
The Wall Street hype organs and trolls had been swarming all over the internet and the media, trumping up the BOE’s “pivot,” and that the Fed would pivot next, and yada-yada-yada. So now, the BOE not only didn’t pivot, confirming what it had said all along, but also dished up an ultimatum to the pension funds.
The BOE has been in communications with the pension funds, and with the investment banks that sent out the margin calls to the pension funds, since before the crisis erupted into public view. So we can assume that the pension funds and investment banks have known about the finality of the bond purchases, that the end-date as announced on September 28 would stand, though they lobbied hard for extending it through the end of October. Bailey’s message today surely is no surprise to them.
But it was a surprise to the stock markets in the US that were still dreaming about the wondrous BOE pivot that would be the precursor of the Fed pivot or whatever.
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As mentioned in an earlier post regarding possible Wolf site T-SHirts…
My suggestion was:
BTFD – The Fed Will Pivot (lol)
PS It doesn’t take much to get the Pivot People worked up (Again!)
The headlines on some top business news sites seemed to indicate BoE Pivot.
After reading the article,it looks like Fed is the sun in this galaxy (leading tightening), the BoE is a planet (atleast reflects light by not fighting high yields) and the ECB is a black hole (>20% inflation in some countries with minimal bond yields).
I say Euro is doomed far ahead of Pound.
Great article, Wolf, thank you. Let’s see how much ‘stuff’ BOE will buy in the next three days.
As a subtext to this story I have seen rumors on interwebs that Blackrock was pushing these LDI “products”. It’s like they always manage to package and sell some ‘product’ under a new acronym just in time for the next crisis.
Apparently, BoE purchased £2.75B today.
Piling up, but still RELATIVELY small pile.
Who’s counting £10B here or there? QE for ants?
We will see soon enough if this “Not QE, but a Special Monetary Operation” will escalate into “full-blown not-QE” as notable other SMO recently has.
Hypothetically, if BoE deploys further funds to shore up guilds, pension funds, or other unsound financial instruments and entities for which the bank is responsible, which total would label it a “real QE”? £50B, £100B, £500B?
Or maybe “This is not a QE even at £100T because…”?
Does that SMO stand for special monetary operation or special military operation? It`s difficult to know these days. Or maybe they are the same, dressed in different attire but to the same end.
Just a crack in the damn to stick your finger in but what happens when you run out of fingers due to fragmentation?
A crack in the ‘damn’ what, ‘dam’ you!
This is the fun part where everyone holding cash gets to sit back and relax as all those little dutch boy cracks start to leak and the Great Liquidation begins. Cash will be king again, and we’ll all be picking up assets on the cheap. If we still have a country, and freedoms, and no zombies anyway.
You mean cash is not trash? Did anyone tell Ray Dalio?
Yes, someone told him. And he changed his mind now.
He’s a trader. His “long term investment” comments have a time horizon of a month. As far as his other comments go, cf Mike Tyson.
BOE is battling the long tail. Announcing that they *could* buy a lot should prevent a crazy run up in prices since now that’s a risk to speculators.
The fact that they aren’t using this power also indicates to me that they’re fine with an orderly rise in rates.
That assumes they know what they are doing.
Just greasing the wheel.
Pension firms are full of actuaries whose job it is to manage risk.
They strut around inside these firms for nine years with the aloofness of members of a special club.
Then once a decade they bring the Pensions industry to the edge of the precipice.
Dumbest smart people I’ve ever met.
I worked one time for an actuary who bit his fingernails right down to the quick. Not a good sign.
Reminds me of the 17 [??] Nobel Prize winning economists who said inflation was not going to be a problem.
Dumbest smart guys in the room.
But I never heard of any repercussions for being so obviously wrong.
Repercussions are for the “Little People.”
So the BoE will buy the Gilts and absorb the losses?
The proper term is ‘socialize the losses’. They will buy if need be.
Oh, my comment with ‘insert acronym here with angle brakets’ got modified. Probably some Tesla AI running on the background, lol
Angle brackets get interpreted as HTML tags.
So for instance italics is possible…
Apparently now anything that looks like HTML gets stripped out… Probably safer that way. But I miss it!
I think if you use the allowed html, it should be OK.
angle brackets around “i” then text, then angle brackets around “/i”
Try it and see if you can make it work.
It Works!
I’m just having one of those “I forgot the actual HTML tags” moments here… D’oh!
At least I know all my money is safe in the financial markets, the Fed’s got my back, what goes down must go back up, etc. Oh wait…
What is HTML, guys?
And is BOE going to buy it?
andy — hypertext mark up language, don’t you know.
I’m a retired techie. I know a few computer languages but not that one. I am a dinosaur.
Ed, I tried programming, but every compiler crashes when it sees ‘my logic’.
Well who will these funds sell to? I am sure there’s plenty of suckers in the market, but the hedge funds etc won’t be buying unless the price is right, and the right price is quite a bit lower than what these funds are expecting. These funds are still thinking that they will get slightly below par or whatever, but anyone with a calculator would be able to work out the correct price. So it’s either the BoE or the funds taking the loss.
John Tuld: We are selling to willing buyers at the current fair market price
It will be indemnified by the government. The indemnification deal with the government was announced on Sep 28.
And how will that be accounted? The government will take the loss? More debt on the government’s balance sheet? LOL. It’s not a real solution is it. Seems to me that the UK still has a date with the bond vigilantes.
If the government indemnifies the BOE, the BOE shows zero loss on its books because it doesn’t have a lot. I guess the government would account for it as an outlay.
Why not just do this all day? If all losses are just accounting entries, what’s the big problem here?
As does Europe,us,Japan,China it’s a global system about to be vanished= nuclear
Wolf,
Later this month, we need a margin debt article to see where we are at! Trying to time the bottom (yes I know it’s impossible) but I believe margin debt needs to be at below 2019 levels before we get close. And that is assuming no recession. With recession, I expect 2016 or 2017 levels????
Thanks,
qt
Bottom is reached when you, and me, and Augustus ran out of money for all the value investments available. Sometimes 2025.
I will.
The Fed will pivot. The reason I am so confident is I understand the Fed from its history of terrible leaders who almost perfected the art of deception but now the world is learning the Fed wears no clothes.
Greenspan sowed the seeds of the asset bubble. I enjoyed watching him sit in front of the congressional committee telling them “I was wrong about the economy”.
Then Bernanke gets the Nobel Peace prize for what? Blowing up the housing market? What a joke!
They steal the QE term from a Japanese guy and try to convince us it’s just temporary (remember Nixon in 1971 using the word temporary to explain how gold will be decoupled from the fiat dollar? – and over 50 years later that temporary sure is a long temporary).
Then we get Yellin telling us that QT will be “like watching paint dry” and boy did she get that wrong. She said she’ll never see another financial crisis in her lifetime… well guess what Janet… it’s right around the corner.
Then Jerome Powell tells us a new word – transitory – inflation is transitory – well he totally failed that prediction. Oh and Janet gets promoted to Treasurer because she did such a terrible job as Fed Chair, let’s see how bad she can mess up the Treasury. She agreed that inflation was transitory but then she came out and said she got that wrong too. Surprise, surprise.
How many times do we have to see the Fed Chairmen have no idea what they are doing? They have lost the plot in their dot plots.
Why do people have such faith in the fed?
Come Friday, I believe the BOE will pivot. They are plugging the dam with fingers they don’t have. They can’t let people lose their pensions. They are politicians at the end of the day and they will do anything they can rather than face the music.
And the Fed and US markets think they are free and clear from the EU UK Japan mess but as the rates rise the tide moves out and we will see as Mr Buffet told us, the people who are swimming naked.
The fed will pivot.
The fed will pivot.
The fed will pivot.
Maybe if I type it enough, people might rethink their blind trust in an institution that has muted the markets from acting like markets. But they can’t do this forever and now I believe this time is different – this is the time where the markets tell the Fed who is the boss.
I believe by the end of this year we we get a Fed pivot.
I’m just some dumb guy who thinks he understands economic laws like “if you print infinity amounts of fiat you will end up at or near hyperinflation”
In summary – Fed = Bad and Buy Gold. Don’t pivot on that.
When its rate is in the range between 4% and 5%, it will pause and hold rates. A year ago, I figured and said it would do that at 4%, now it looks like it will be over 4%. If you want to call a pause at 4.25% a “pivot” be my guest.
If the FED announces a “pause,” no matter if it’s 4% or 5%, the stock market will go parabolic. There’s simply too much money sloshing around. WAAAAAYYYYY too much. A pause means a continuation of mass inflation. You can’t just raise rates for 6 months then stop, keeping the fed funds rate HALF of the inflation rate, and expect that to do anything to bring down inflation.
QT continues, the housing market continues to tank, mortgage rates above 7%, junk bond yields in the double digits, share buybacks down to a trickle, M&A dead, IPOs dead, SPACs dead, earnings in decline, losses spreading, some bankruptcies to boot… not sure how the stock market is going to “go parabolic.”
They pivot and deal with pissed of masses who cannot afford to heat their homes or eat while watching the connected elites get even more bloated. Or they stay the course and face the wrath of the bloated serpents? So the question is, was this just a Crazy Ivan to clear the baffles or a sign of a course change.
We’re just 3 meals away from chaos,need to watch crop production numbers,could be bad in a drought. Money really doesn’t matter when there’s no food heat or shelter
What we have here is a failure to accumulate!
failure to accumulate!
Hahaha!!! I wonder how many posters will get the reference?
If only Luke can keep his hands cool and not cough up his portfolio during the upcoming panic plunges…
Far from losing his portfolio, Luke will use the upcoming panic to make his escape.
Just keep shaking that bush ….
Many are unaware of the very real global systemic risk / contagion that exists throughout the global economic landscape. None of this has been addressed directly, yet smoothed over for the past 25 years. Global OTC notional derivatives have grown from $80T in 2000 to today’s reported $500T +, yet likely exceed $2Quad and it’s all intertwined. In essence, this has been ongoing for quite some time yet literally papered over with no one willing to address the root problem, which resembles a cancer that is untreatable via radiation or chemo. The entire global economic landscape is infected beyond control / repair.
Ye gawds, the fed wont pivot for years. Wolf is absolutely correct, and it will take a nuke to move them.
Otherwise, buckle up for a long liquidity drought. Everyone is thinking it will go back to normal asap with fonts of cheap easy money. Nope. Get used to liquidity being like Colorado river water, oversubscribed for decades with the bill due now.
Inflation has hardly begun yet we are all expecting miracle cures from the Fed. I don’t think so. A long slog awaits with so much damage. Liquidity is now the name of the game, not cost of funds, not the gains in the stock market, not return on equity.
I find so much amazing to watch everyone struggle with the new circumstances. Change or go broke, investors. Everyone else just pays a lot more for less.
Astrologically speakin – til 2024
Remainer-humiliated London financial analysts and UK financial media continue to (massively) exaggerate and overstate the UK’s financial “problems” to try and embarrass the Brexit-winning Conservative ruling party, who they desperately want kicked out.
The run on the UK pound and UK pensions is mostly political and emotional, not economic. Remainers want revenge, and they are a determined bunch ;-)
Is that ;-) denoting sarcasm?
I see no evidence that the UK Tories require any assistance whatsoever in embarrassing themselves.
If uk bond market crashes,it will be GLOBAL
Lol
Wonder what the actual sale of the GILT has been total and how much remaining
It’ll be interesting to see if any pension funds, whether by choice or necessity, test the BOE’s ultimatum after 10/14.
I think that’s not an “if” but a “when”.
And it’ll also be interesting to see what breaks next.
While inflation rages, each modern-day Lehman will be allowed to fail. In the immortal phrase of 2008, “this sucker could go down”.
I’m happy to place a wager with you Wolf. If I’m wrong i’ll buy another beer mug. I’ll probably buy one anyway. Dollar swap lines open and QE re-stars en masse before 2022 is finished. Deal?
I’m not a betting man in the comments. But you can tell me on Dec 31 if you won or lost. Bookmark your comment. The link is under the date.
BTW, the Fed has had open swap lines for decades with other central banks. And they’re using them from time to time for small amounts. The big amounts come during some kind of crisis.
Done! Will follow up closer to EOY.
Wolf said: ” The big amounts come during some kind of crisis.”
———————————————————
alternatively: The big amounts come during a bailout they call a crisis ………..
It is a crisis I foresee, not a controlled pivot due to cost pressure easing.
Swap lines are already open…
After the midterms inflation will take a second leg up and they’ll have to increase interest rates a lot more. I’ve been telling everyone this for ages. You’ll see after the midterms are over. Instead of a pivot we’ll see a large increase in interest rates.
OT: Inflation is hitting everything. Those NFL owners are getting hit with some big time QB salary increases and WR salary increases the past 2 years. You got to feel sorry for them… huh.
Same goes with college football coaches and the wage inflation colleges are seeing via the new salary demands of coaches. It must be a little painful having to pay all those assistant coaches over 1 million a year. At least they do not have to pay the college players. Unlike most jobs where you only get 2 weeks of severance pay, college have to pay out years. I read colleges over the past 4 years have paid out 300 million to fired coaches. LOL
The free for all races at Mohawk and Woodbine have gone from $34,000 to $58,500 in two years.
Thanks Wolf, I read you for your clear thinking. Its appreciated. And for anyone out there, which way do you think the pound will be going amidst all of this?
If the BOE sticks to rate hikes and QT starting in Nov, eventually the pound will bounce, but maybe with a delay. That’s my bet. QT and rate hikes are supportive of the pound. Right now, markets are still betting that the BOE is going to keep buying bonds forever and not hike its rates.
The pound will bounce around, before going on par with the Canadian dollar, which in turn will reach the aussie, and all three will settle at a kiwi. 50 cents, same as Euro.
If Stephen Poloz was still in power the Canadian dollar would already be at 50 cents.
Pounds, gilt…fiscal fitness is never easy, am I right?
Yet beware as fiscal diets tend to be extremely unpopular and don’t last very long…
Central Bankers all pounded long rates….and now the beach ball held under water cant be held anymore.
Enter the Central Bankers to assuage their created situation.
Why are Central Bankers involved in the long end at all? Nothing to do with current inflation or unemployment…..but their game of taking away fair yields to FORCE FOMO investing is blowing up in their face.
I must admit I was pretty surprised by the BOE today. What was even more surprising is that people still think they are bluffing. Good luck with that strategy
Question : if BOE does purchase gilts from an LDI client, what is the purchase price? If just FMV, doesn’t the still leave the seller underwater on its debt? Thank you! Love your columns. I live only blocks away from Wolf HQ 🙏🏼
The BOE buys at the auctions it holds every day. It doesn’t buy directly from some fund. The fund has to show up at the auction and submit some securities it wants to sell.
The BOE has minimum reserves. So it doesn’t buy everything that is offered.
I thought they were going to buy the bonds of the naughty countries and not those of the nice ones? Read that here, even.
Wha happen?
Did the bond vigilantes start kicking the nuts of moral hazard and get bruised plums?
Meaning the moral hazardists got their plums purpled?
They, meaning the EU countries. I guess the UK brexited from the benefits of that shadow QE but is causing ripples.
In any case it shows the fragility of the EU system of foreign debt disguised as a unified currency.
Ring around the rosie they all fall down.
BOE was crafty … the mere possibility of such large purchases helped the actual purchases go further.
But what about these pension funds playing with risky structured synthetic products? So if actual investment assets don’t offer the return profile you need just create some out of whole cloth? It doesn’t work that way … no free lunch. Let the managers or whoever devised these investment policies lose their jobs … if someone has to be bailed out it should be the innocent pensioners instead. In the end it would cost less … subsidizing foolish behavior only encourages more of the same.
Finster
The Pensioners’ lobby is one of the most ferocious, hypercritical and self-interested groups ever devised.
The same cohort that told their kids money doesn’t grow on trees, said nothing when they saw their assets grow and grow from a printer and the next generation’s debt burden explode. It’s not innocence but wilful ignorance. They are not alone of course.
The only innocent people are those who saw through the greatest ever scam and maintained a consistent position in the face of all propaganda and BS. Thankfully, some of them can be found on this site.
Correct. They keep bailing out the wrong people to save a corrupt insider financial system. It is corrupt cronyism. All part of a corrupt to the core financialization by master systemic manipulators – bankers and financial types – to impose debt slavery on those susceptible – all while socializing the downside.
When do we all collectively agree that the wheels have come off the bus? I don’t think that’s happened yet but it’s looking kinda close.
CNBC guests still “buy,buy,buy”. Not much pain showing up there yet.
Mostly talking up there book,on cnbc Steve Weiss. Is truthful but gets a lot of sarcasm ,seems to handle it well. Najarian brothers are in hiding
It gets mighty hard to argue with the Millennials about the foolhardiness of cryptocurriencies when (supposedly) “professional” money managers in a SINGLE (supposedly) “sophisticated” country invest PENSIONERS’ retirement money in a £1 trillion of “liability driven investment” (LDI) funds.
The TOTAL amount of cryptocurrency of every country on the PLANET isn’t valued at a trillion dollars… much less a trillion pounds.
Go big or go home. The Brits are making Americans proud.
This is the best-announced mega-crash in the history of the financial markets. Actually, in all of history. I mean, with some central bank talking head even giving you the exact date when the brown matter will inevitably hit the ventilating device (it’s already flying in mid-air right to the center of it) there really is not much more they could do. And that after some other CB honcho told you in no uncertain terms that yes, he will crash the housing, labor and any markets that he can crash because it’s all over anyway and that way some people can still run for the hills – and fast.
You cannot say you have not been warned.
You really can’t.
Karma is on you. And it’s a b*tch.
Pity they didn’t dish out this tough love in 2008.
In the past two weeks the Bank of England has vacillated endlessly. It’s pointless guessing the next move or what is really going on behind the scenes with pension funds.
The recently announced further increases of bogus money made available to support pension funds were inextricable when juxtaposed with actual purchases and the deadline. On their face, these announcements were unnecessary. I’m content to make sense of this retrospectively, when more truths appear.
I’ve played it safe on this post, so here’s some irresponsible conjecture. Could it be that the Bank of England has been tipped off about September’s US CPI data and has prior knowledge that bond yields are about to plummet?
When bumbling bureaucrat Bailey of the Bank of England speaks with such authority and decisiveness, only days after too many flip-flops to mention, it’s time to question the incongruity.
AB,
The “incongruity” that you mention hasn’t been in the BOE’s actions but the financial media’s clickbait BS about the BOE’s actions, which the clickbait media called “pivot.” And they made a lot of hay with it. But there was no pivot, I told you that from the beginning on Sep 28, and every time I wrote about it since then. But to people who believed this clickbait pivot BS, the BOE’s steadfastness suddenly seems to be “incongruity.” Go figure!
I was a little too rude about Governor Bailey, but I can’t extend my regret to calling him steadfast.
Steadfast since Sep 28, not since forever, LOL
They dont wanna sell their gitls, they wanna sell everything else on their balance sheet. No liquid market for their Junk and CRE ports, and no takers to swap that into gilts because swap players know that they’ll be bagholding the junk once those funds sell those borrowed gilts and leave the swaper with the junk…
Anyone selling the collateral that they can borrow cash against is a fool, anyone selling the borrow collateral that they swaped into with junk is getting out like a bandit…
BOE inflation is 10% which means real inflation is double that .
Hi wolf
My question
Why don’t pension funds sell their securities to BOE ?
Sincerely
Engin YILMAZ
Because the BOE doesn’t buy securities that way. Under this new program, it holds daily auctions every day, and pension funds (actually their LDI funds) can submit offers to sell. The BOE uses reserve pricing and so it doesn’t buy all the stuff that is offered but only small amounts of it.
Announcing a bond purchase programme with an end date two weeks into the future is like a dealer telling his junkies they can get the teaser shot, but then they’re on their own. Especially when at the exact same time your gubment announces it will go Into debt like a drunken sailor and just hammer the markets with “Gilts”. It removes supply from the market and makes prices go up in the short term (and interest rates go down which is the whole point) but unfortunately those idiots who sold their Gilts to the BoE do not profit from the rising prices because, well, they sold their Gilts to the BoE and do not have’em any more ! QE only “works” when it is unlimited and allows everyone to have a party on forever falling rates – if you can call that “work”. Ask Jay how he thinks about that.
What the BoE did was beyond stupid. Now they get the blowback. And it won’t be funny.
Quoted without comment from MarketWatch.com:
“Pointing to the bond-market turmoil in the U.K., McDonald [founder of The Bear Traps Report] said government bonds with 0.5% coupons that mature in 2061 were trading at 97 cents to the dollar in December, 58 cents in August and as low as 24 cents over recent weeks.”
“When asked if institutional investors could simply hold on to those bonds to avoid booking losses, he said that because of margin calls on derivative contracts, some institutional investors were forced to sell and take massive losses.”
“And investors haven’t yet seen the financial statements reflecting those losses — they happened too recently. Write-downs of bond valuations and the booking of losses on some of those will hurt bottom-line results for banks and other institutional money managers.”
This is so Darwin … wolves eat sheep. Give the IBs credit for bringing their ‘A’ game. The dumb money is pension, sovereign wealth, municipalities, etc. Go IBs!!!
I’m a week behind reading all the financial news in my email. So as I read this GDFA and the comments I expected someone to post an update on what happened 10/14, 3 days ago now.
But after reading the comments the answer is anticlimatic because Wolf said in the comments the UK government is backstopping any losses the pension funds incur on exiting the LDI positions. So big whoop, no pain again for the risk takers, socialize the losses and move on. There’s no need to extend the BOE assistance, the government will pay for it all. The score now: Moral hazard 23, Taxpayers 0.
“Wolf said in the comments the UK government is backstopping any losses the pension funds incur on exiting the LDI positions.”
I said no such thing. On the contrary.
https://wolfstreet.com/2022/10/16/the-wolf-street-report-return-of-the-bond-vigilantes-sends-shockwaves-around-the-globe/
https://wolfstreet.com/2022/10/11/bank-of-england-bought-only-small-amounts-of-bonds-even-today-warns-pension-funds-they-have-only-three-days-left-to-unwind-derivatives-with-boe-support/