Surely the cost of the debt is fixed at the point the govt issue it? So if they sell a 4% gilt now, and subsequently yields rise to 7%, that only affects the holders of the bonds. Ie they lose part of their capital. The cost to the govt is the same - 4% of the initial sum borrowed.
A most impressive calibre of post.
Wat,
do you know what proportion of households pay tax?
Deliberate Inflation is redistribution from savers to debtors.
Of course this socialist government and rent seeking MPs will love it.
Of course it will destroy the economy.
the gilt purchase programme now accounts to 10% of GDP (FT)
Well, BoE decided yesterday not to expand the QE pot.
Wat, you used to give us those money supply figures and comment on the position, so can you update us? I thought, perhaps mistakenly, that the ballooning of M4 (a) meant that the banks were creating extra money, (b) it would be bad for us, (c) it was bad for us and a lot of it evaporated, thus causing the credit crunch. So if more govt-printed money is injected, should not that be improving liquidity (but it seems that it isn't) and be good for us?
No worries WAT old son. Keep an eye on Iceland. The boys over there have managed to get inflation down to 12% from 18%. And you can get 16% on overnight money. You may have a sleepless night though.
(The author wishes to point out that no similarity between Iceland and the UK is implied).
Sobers: you've missed the fact that Govmt issues gilts on a regular basis to people who can also buy existing debt. So to take a very simplified example if, say, £100 of gilts @ 4% coupon is trading in the market for £57 (which gives a 7% current yield), why would an investor pay £100 for new gilts they could buy in the market for £57? Falling prices for existing gilts must have a knock-on effect on new gilt issues.
@William Norton: of course new debt must be issued at the new higher coupon, but existing debt is unaffected. Thus the extra cost is not 3% of ALL the outstanding debt at the point of the rate rise, but 3% of the debt raised AFTER that event. A considerably smaller sum.
that only affects the holders of the bonds
That's why we have hedge funds and arbs to intermediate and why few bondholders hold to maturity. The duration of each bond is such that any losses will be realised in the daily trading and quickly ripple across the yield curve affecting LIBOR and other rates.
Since the Government is attempting to insure £260bn of RBS and Lloyds-HBOS liabilities with a forlorn hope of resurrecting these banks it would be very, very, very foolish to try to stiff investors in Gilts when it is British Pension Funds and Insurers that are the largest holders.
The Government could be this stupid, but it would destroy London as a financial centre especially when British insurers are kept afloat by very liberal interpretations of solvency, and the incentives for people to buy long-term savings products are negligible and the sector will face an income shortfall.
The City is currently living on taxpayer largesse in the form of a PIB and whether the nation ever stabilises its financial situation depends on the Government not trying to screw bondholders as they screwed bank shareholders with 12% Coupon on Prefs and a 101% redemption requiring special rights issues to remove liquidity from institutional investors thus countering the whole professed basis of QE
Commenting by HaloScan
