Reply to: On a scale of 1 to 10, we're Fcked!

[jamesbrown]

Useful graphic of the UK risk premium here, gilts baselined to our competitors and shown against the lettuce and post-2006 statistics.

[willendure]

There is noise, but the signal coming through is pretty clear. There have been countless articles on this in the FT and elsewhere in recent days and you need to listen to what bond investors are saying, as much as reading the charts. They are saying that the UK has a new risk premium for the fundamental reasons I mentioned above, excess borrowing, trivial headroom and anemic growth. All these fundamentals add up to the risk premium being described. Again, we're not in lettuce territory, but the additional risk is difficult to dispute.

For sure - but bond investors are saying the same thing about the USA, and most developed economies.

I think rewriting the rules to be able to borrow more is a con. Debt is still debt, no matter how you hide it. Last Labour government gave us PFI for off balance sheet spending, and that was not a good thing long term.

Major tulip show incoming I think - that is why bonds are going up. There is too much debt and the rug is going to get pulled on long term bond holders as there is no real alternative to dealing with all this debt except to inflate it away. I certainly would not buy a bond over 2 years in duration today.

This means a severe shortage of funding for any kind of longer term investing, even though the short term rates are going down. What do you think? Back to QE at some point next year?

[sadkingbilly]

usual tory redneck sh1te

typical

[jamesbrown]

It just happens that the US faces some significant and accelerating risks at present too like, er, a massive trade war and a massive budget deficit

[jamesbrown]

Fair enough. But zoom out to the 1 month chart, and both have risen 40 basis points, so I am counting that as just noise.

Friend of mine applying for a mortgage at the moment, and was surprised when I told him not to expect a better rate even if the BofE puts rates down at the next meeting. Seems like short terms rates are going down, but longer ones are going up, and that is the globally synchronized picture.

There is noise, but the signal coming through is pretty clear. There have been countless articles on this in the FT and elsewhere in recent days and you need to listen to what bond investors are saying, as much as reading the charts. They are saying that the UK has a new risk premium for the fundamental reasons I mentioned above, excess borrowing, trivial headroom and anemic growth. All these fundamentals add up to the risk premium being described. Again, we're not in lettuce territory, but the additional risk is difficult to dispute.

[vetran]

[willendure]

On the contrary, Treasuries are roughly the level they were at the start of the week, not so for Gilts, which are much higher.

Fair enough. But zoom out to the 1 month chart, and both have risen 40 basis points, so I am counting that as just noise.

Friend of mine applying for a mortgage at the moment, and was surprised when I told him not to expect a better rate even if the BofE puts rates down at the next meeting. Seems like short terms rates are going down, but longer ones are going up, and that is the globally synchronized picture.

[sadkingbilly]

Oh, where is scooter when we need squiggly lined things that mean feck all????

[jamesbrown]

When looking at the 10 year UK chart, always put the 10 year US chart alongside. You can see the rise there is coordinated with a similar sized rise in the US 10 year. In other words, it is not specifically a UK issue. I don't think the markets have quite the negative interpretation of the budget that you think:

On the contrary, Treasuries are roughly the level they were at the start of the week, not so for Gilts, which are much higher. Also, while there is indeed a correlation, they can certainly decouple during election cycles with an election a few days away in the U.S., so I wouldn't pay much attention to that correlation right now. Anyway, my interpretation is the same as the interpretation in most reputable sources of financial information - the budget has not gone down particularly well, and for obvious reasons (massively increased borrowing, massively increased taxes, anemic growth projections, and a tiny amount of headroom that has already been eroded in half by recent Gilt movements). As an aside, I am not particularly partisan w/r to the politics of all this. I hate them all equally, but I would prefer the economy to turn around more than I hate them

[willendure]

Pretty big self off in Gilts again today, up to 4.55% on the 10yr at one point, investors seem worried about the planned tax/spend/borrowing. Treasury will be watching this nervously...

When looking at the 10 year UK chart, always put the 10 year US chart alongside. You can see the rise there is coordinated with a similar sized rise in the US 10 year. In other words, it is not specifically a UK issue. I don't think the markets have quite the negative interpretation of the budget that you think:

[jamesbrown]

Pretty big self off in Gilts again today, up to 4.55% on the 10yr at one point, investors seem worried about the planned tax/spend/borrowing. Treasury will be watching this nervously...

[willendure]

Yes but where would we be infinitely better off investing for the next 20 years?

Not that it matters in my case because I'll be lucky to make it another few.

Exactly. Its easy to be an armchair investor looking back over the last 20 years and pat yourself on the back, even though you did not hold the nasdaq for those 20 years.

The point is, you can get better fixed returns than a savings account, and the risk is likely a lot smaller than you might think. Bonds have default risk, but equities have the same default risk too plus the entrepeneurial risk. So there is a spectrum of risk. The "great moderation" has ended, and some commentators are saying that the extra yield gained from the equity risk could be a lot smaller over the next 20 years.

Its fixed income, but you achieve growth by reinvesting the income, so it compounds.

I really do think it is a good book. Particularly as it covers a wide range of possible sources of fixed income, and gives very specific recommendations on the funds to use, their rates of return and so on.

[woody1]

Would have been infinitely better off just investing in the Nasdaq 100 ETF for the past 20 years for fantastic and easy growth.

Yes but where would we be infinitely better off investing for the next 20 years?

Not that it matters in my case because I'll be lucky to make it another few.

[willendure]

A chart for you of the 10 year gilt yield.

You can see the Truss/Kwartang peak in Sep 2022. Personally, I think it was only tangentially their fault, for one thing the peak started well before their budget, it was also a timing thing with some bond selling by BofE. Anyway....

No major shift today.

But also has been rising ever since interest rates were cut, and in the US too. Anticipation of increase inflation.

[willendure]