Welcome to our #134 weekly newsletter.
“For women taking control of their financial future”
-Jana Hlistova
From The Purse
In this week’s newsletter, we focus on the UK bond or gilts market and understanding why the Bank of England (BoE) had to intervene last week by committing to buying £65bn of long-term government debt over a 13 day period.
And don’t forget to listen to The Purse Podcast interview with Shaun Richards where he talks about the UK gilts market, why the BoE had to intervene, can they stop bond-buying and what’s in store in Q4 and in 2023.
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And you can review the news in brief so you stay on top of global financial, economic and investing trends.
I hope you enjoy this week’s newsletter.
Until next week,
Jana
UK bond market: BoE says its £65bn gilt intervention prevented a UK financial crisis
The BoE has said it intends to start its ‘quantitative tightening’ (QT) programme October 31 in order to reduce its debt.
On Thursday last week, the Bank of England (BoE) launched its emergency bond-buying programme in the wake of chancellor Kwasi Kwarteng’s ‘mini’ Budget, as reported by The Financial Times.
This intervention avoided pension funds selling £50bn of UK long-term government debt ‘in a short space of time’ and prevented a likely UK financial crisis.
The BoE has said it would buy £65bn in bonds or gilts over a 13 day period and indicates how close the UK came to a market meltdown after Kwarteng’s £45bn ‘mini-budget’ of unfunded tax cuts.
Sir Jon Cunliffe, the BoE’s deputy governor for financial stability, explained in a letter, that had they not intervened ‘there would have been a “self-reinforcing spiral” that threatened “severe disruption of core funding markets and consequent widespread financial instability”.
The BoE had also received warnings from managers of the liability-driven investment strategies as early as Friday September 23 that the huge moves in gilt yields would force them to dump large quantities of government debt.
The BoE has spent just £3.8bn in the first seven days of its programme, far below the potential maximum of £35bn.
According to investors, ‘the possibility of larger central bank purchases had been successful in backstopping the market and giving other buyers the confidence to step in’.
However, bond yields moved higher again after the BoE did not buy any bonds on Tuesday or Wednesday.
Cunliffe has confirmed that “These operations are not intended to create central bank money on a lasting basis, nor are they designed to cap or control long-term interest rates..”. Therefore this effort should not fuel inflation.
Last week’s gilt purchases has delayed the start of the BoE selling gilts from it portfolio to shrink its balance sheet (or debt).
The BoE has said it intends to start its ‘quantitative tightening’ (QT) programme October 31 in order to reduce its debt.
Given the high levels of debt globally, rising interest rates and general nervousness by investors, it is questionable how long the BoE can sustain its QT efforts.
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Listen to The Purse Podcast interview with Shaun Richards where we talk about the UK economy, the UK bond market & its near collapse, BoE’s intervention and what’s in store in Q4 and 2023?
News in Brief
Financial news
IMF chief warns world heading towards age of greater instability. Kristalina Georgieva points to ‘fundamental shift’, with fragile global ties and more frequent natural disasters.
US recession 'now over 50% chance'. A US recession is now “more likely than not”, Capital Economics say.
Bank of England (BoE) confirms pension funds almost collapsed amid market meltdown.
Deutsche Bank: UK economic outlook has weakened further. It predicts that UK GDP will fall by 0.5% in 2023 (down from a previous forecast of 0%), before growing by 1% in 2024, when the economy would finally return to its pre-pandemic level.
Money markets expectations of UK interest rates are rising. With bond yields rising again, the markets now indicate Bank of England base rate could have jumped to 5.8% by next June.
UK Chancellor, Kwasi Kwarteng to ‘work closely’ with banks as five-year mortgage rates hit 6%.
UK price cap on household energy bills expected to cost £89bn. Liz Truss’s intervention to freeze domestic energy bills could cost between £72bn and £140bn, analysis finds.
Rating agency Fitch downgrades UK credit outlook. Lack of independent forecasts at mini-budget and clash with Bank of England’s inflation strategy prompts cut.
Crypto: bitcoin, ethereum, DeFi & NFTs
Investors free gold and Bitcoin, pushing correlation to new 12-month high-they are attracted by a strong US dollar and high bond yields.
Bitcoin stays close to $20,000 as US stock futures traded down. Ethereum gained gained approximately 1% and is trading around $1,300.
State of Ethereum Report: Q3 2022. An overview of protocol metrics, DeFi, NFTs, Layer 2 and development.
Solana’s latest downtime caused by code bug and malfunctioning node.
Celsius creditors face fallout from U.S. bankruptcy disclosure process. Celsius produced a trove of documents this week containing creditor information that has some worried they may be left vulnerable to cyber threats.
Modular Asset Management, crypto hedge fund focused on ESG buys Algorand and Polkadot.
Crypto slump leaves 12,100 coins trapped in zombie trading limbo ( coins that haven’t traded for a monthy by year).
The Purse Podcast
We cover the following in our conversation:
UK bond market
Can the Bank of England stop printing money?
Will interest rates continue to rise?
UK housing market
What’s next: Q4 and 2023
Listen on all podcast platforms including Apple Podcasts.
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We’d love to hear from you. Get in touch with Jana via the The Purse website or tweet @jointhepurse and @janicka.
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