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Is UK austerity over? Cue the Autumn budget

This week’s Budget and Bank of England meetings may shed some light on a key question for investors and millions of taxpayers: After eight years of fiscal tightening, is austerity over and will the economic burden shift from monetary to fiscal policy? I wouldn’t hold my breath – something which may cheer gilt investors, at least for now. Let’s see why:

In her recent Conservative Party conferenc…

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The Great British Austerity Myth

On the right is UK Chancellor George Osborne, the austerity axeman.  On the left was opposition leader Ed Miliband, the fiscal freedom fighter.  But it now appears that Miliband and co are so alarmed that Cameron and Osborne are better trusted by the electorate to run the now booming UK economy that they are quietly embracing Tory austerity. The Liberal Democrats have accused the Tories of purs…

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Insane in the brain. Dangerous precedents being set in Cyprus

Depositors in Cypriot banks awoke on Saturday morning to learn a harsh lesson. A guarantee is only as strong as your counterparty. With the Cypriot banking system requiring €10-12 billion of bailout funds – some 60% of GDP – the government has been forced to accept burden sharing with depositors. Depositors who went to bed Friday night believing their savings were safe awoke Saturday to find th…

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Irish eyes are crying when they look at the economy

With St. Patrick’s Day around the corner, we thought there would be no better time to do an economic update on Ireland.

In November 2010, Ireland found itself bankrupt. Dublin’s promise to keep bank creditors whole resulted in a massive increase in its debt obligations – too big for the government to remain solvent; especially after yields on 8 year government bonds rose to over 7% (they would …

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Financial salvation not repression

There have been a lot of investors and commentators talking about financial repression. The fact that nominal interest rates are set at or close to zero, and the subsequent transmission of these low returns along the yield curve means that returns in both nominal and particularly real terms are historically scant. This is seen as a government and central bank policy that is punishing savers.


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If the government simply cancelled the £300 bn+ of QE gilts held by the BoE, who would be unhappy?

The UK sits unhappily at the very boundary of what debt burden is acceptable for a AAA rated economy.  If growth continues to disappoint, or if more austerity becomes socially impossible, the UK will be downgraded – and neither of these possibilities look very remote.

At the moment the UK public sector net debt to GDP ratio is about 63%, equivalent to about £1 trillion (these numbers exclude th…

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The 5 things that bond investors have learnt from the Greek default

1. The price charged by central banks for saving the world is seniority. The ECB did not take haircuts on the Greek debt it had bought as part of its SMP bond buying programme. Did you spot the clause in your bond documents that said that you were buying the subordinate tranche of the government bond market? Of course it never existed – in extremis, which is exactly where we are – the law is to…

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Ireland (austerity) vs Iceland (default) – who’s winning? And a Twitter update…

Back in March we wrote about Iceland’s response to the banking crisis, and how it differed to other countries that stepped in to support their banking systems. This week, Paul Krugman commented about Iceland’s exit from its IMF programme.  The IMF has declared that programme successful, and Krugman claims that Iceland is back in the capital markets and has its “society intact”.  He puts this su…

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What is risk off?

Recent selling of risk assets into traditional haven government bonds has taken their yields back near their all time lows. Will people continue to buy them in a risk off trade? We are almost certainly nearer the beginning than the end of a western world sovereign debt crisis. That means quite clearly that Gilts, Bunds and Treasuries are not the ‘risk free’ investments they once were. In relati…

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Is an ‘A’ rating the new ‘AAA’?!

We’ve written recently about the bond world going ‘topsy turvy’, in that a consequence of QE may be that the higher inflation economies could end up with having lower yielding sovereign bond yields than the lower inflation economies.

Another way that the bond markets are starting to look topsy turvy is in terms of sovereign credit rating versus a country’s perceived risk of default, whereby a n…

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