Just reposting my Twitter thread from earlier on Friday for the benefit of those who don’t necessarily check in on social media too regularly:
THREAD: I really think the market's got the whole Gilt panic thing wrong. If you actually read the BoE market notice for this week's gilt purchases you will see this is not a conventional QE-style permanent asset purchase. It's much more akin to an Open Market Op or (OMO).
— Izabella Kaminska (@izakaminska) September 30, 2022
It continues thusly:
Before QE became normalised post 2008, OMOs were always standard practice for central banks hoping to reduce temporary market aberrations. What changed post 2008, is that these ops became permanent. Even then they were mostly still sterilised.
Nonetheless, de facto “permanent” asset purchases were mostly interpreted as money printing. I used to get annoyed by this, pointing out they were more of an asset swap. But over time I realised what i think is irrelevant.
If the market perceives it to be money printing it’s money printing. Even so, QE-style asset purchases were entirely driven by the zero bound. They were a function of cbanks not being able to stimulate the economy with rate cuts. This is clearly not what’s going on today.
What we have today is much closer to an open market operation. The clue is in the BoE’s market notice. Key words/phrases are temporary, targeted and “restore orderly market conditions”. This is not QE. This is an OMO:
This is why upon further reflection, what the cbank is doing is not bonkers or conflicting with a rate hiking regime. It is a mere function of intraday funding bottlenecks and plumbing issues.
The reason why the plumbing can’t handle these stresses easily, meanwhile, is because it is still structured around whole-day funding as opposed to real-time needs based. There is no Uber surge pricing mechanism, and there needs to be one.
It’s a shame the entire situation has been hijacked by politics and the British media’s incessant obsession with self-flagellation on all matters UK. I really think the signal was lost in the noise.
At first, I too got swept up in the hysteria and was inclined to go all in on the “end of Britain” narrative. Luckily, I had Neil Collins on the line in the thick of it to remind me that a bloodbath more often than not is a buying opportunity.
Frances Coppola has since come out with an equally aligned and thoughtful take that is worth your time.
Perma bear Albert Edwards, meanwhile, provides some worthwhile plumbing context which further supports the notion that it was a gilt market bottleneck issue that unnerved the pound more than the tax cut announcement.
Trash-talking Britain is easy. Coming up with better policy paths is hard. I’ve not seen much in the way of anything better.
2 Responses
Seems a more balanced analysis than others.
Begs some questions though and or missing details.
First why the long end wobble? Since it appears the problem is likely in Repo and or reverses which do not lack liquidity ordinarily (some multiples of 10s of billions a day) and holdings are not likely only at the long end.
Is the root possibly just a temporary buyers/sellers/ market makers strike due to volatility in rates and currency? In which case what would solve this type of problem, barring a permanent BOE trading operation or volatility limiting trading rules?
I think this is a classic market-maker of last resort role. I equate it to an uber surge pricing moment. It’s not that the liquidity isn’t in the system it’s just in the wrong place. Like when a big event finishes and everyone needs a taxi. Because the market has no intraday funding signal there’s no way to incentivise the liquidity to come to where it’s needed quickly. Other times there is a bottleneck to do with rounding up/netting the roundtripping through the market. Other times still it’s a question of geography. The liquidity is there just in the wrong time zone. Either way, a temporary bridge is needed. It’s not a buyers strike as much as a comms problem. I think the fact this was all swiftly handled suggests this is exactly the case.