The Real Culprit in Britain’s Bond Meltdown
The bond market chaos that rocked Britain in the autumn of 2022 was an inside job – at least according to recent research by the very central bank caught in the middle of the mess. The WSJ’s Joseph C. Sternberg explains:
It’s the story everyone thinks he knows: Hapless Prime Minister Liz Truss and reckless Chancellor Kwasi Kwarteng on September 23rd, 2022, announced a big package of energy subsidies and tax cuts billed as a “minibudget”. The prospect of massive deficit-funded fiscal giveaways by a government already labouring under enormous pandemic-era debts stirred bond vigilantes to action. Yields on British government bonds, called “gilts”, surged and the pound plunged as global investors recoiled from Ms. Truss’s supply-side voodoo.
The myth persists – or rather, is perpetuated by a lazy political and media class – despite obvious holes. Ms. Truss and Mr. Kwarteng signalled for months about the contents of the minibudget. Most of it was uncontroversial energy subsidies, and the bulk of the rest was plans to scrap planned tax increases. The only surprise was the proposed elimination of the top 45% personal income-tax rate, bringing the top rate to 40%. At projected annual forgone revenue of a few billion pounds, this was trivial in a total budget of £1.2 trillion in 2022-23. And the proposed tax cuts were never implemented anyway.
The thing that melted down in response to this fiscal nonsurprise wasn’t “the market”, it was a badly constructed hedging strategy popular among defined-benefit pension funds. These hedges – a response to the Bank of England’s chronic error of suppressing interest rates while tolerating above-target inflation – would have imploded eventually anyway as BOE Gov. Andrew Bailey belatedly joined the battle against rapid inflation. …
This history is worth getting right because, even now, the so-called Truss fiasco is cited as an argument against supply-side policies. Ms. Truss’s Conservative Party abandoned her agenda in the face of a market panic largely ginned up by the Bank of England, and now this episode is being cited as a warning against similar tax cutting in the U.S.
Worth reading in full.
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As a prole, I never noticed the bond meltdown
(Less of a flying one I couldn’t give! The price of a pint or a gallon bothers me more!.. Sorry Richard)
Not entirely true, it wasn’t hedging strategies that caused the problem, but rather a Bank of England approved strategy called ‘Liability Driven Investing’. It was used by pension funds to increase the return on their fixed income portfolios. Essentially it meant borrowing money short term – at near zero interest rates, to buy long dated Gilts yielding a couple of percent. These Gilts were bought on margin – which meant that if the value of the Gilt holdings fell, and the short term loan (the pension funds liability) was no longer exceeded by those Gilts ( the pension funds asset), then the fund had to stump up the difference in cash. To get the cash the fund was forced to sell their asset. In a bull market this doesn’t happen, in a bear market though…..The truss budget came at the end of a devastating 18 month long bear market in Gilts. Every day leading up to that budget more and more cash for margin was required, putting more and more selling pressure on the market. Just before the final collapse the Bank of England said they were going to be selling their own gilt portfolio, acquired during the rather stupid… Read more »
Many thanks for the ‘insider’ knowledge. 👍
Thanks for that. I followed the excellent Liam Halligan on this debacle and he agreed that BOE etc was at fault. It seemed to me to be a coup to install the chosen Sunak, against the wishes of the membership.
And funnel in all Sunak’s mass immigration, as per the policy of our Trilateral Commission/UN/WEF overlords.
Correct the globalists wanted Sunak in Truss out. All a stitch up as usual.
Thanks Andy. A more in depth explanation of LDI’s and what really went on here.
https://capx.co/did-liz-truss-really-cause-the-bond-market-rout/
Yes, this article by Jon Moynihan explains the Liability Driven Investments problem very clearly:
https://thecritic.co.uk/issues/december-january-2023/how-the-bank-broke-the-government/
Very good – thanks for posting
Especially since the WSJ article is behind a paywall.
And, the aptly titled Financial Catastrophe Authority was in on the LDI thing. Their various flawed interventions drove pensions and annuity managers to use LDI to ‘comply’. And what was Bailey’s job before he got the bank job? Yes. The FCA. Where he also failed.
And people labelled Truss a fool for not knowing about LDIs. I am an active investor and am aware of most financial instruments but these were a new form of casino banking to me.
A very good description of a gilts version of ‘shorting’. What is also missing from the truth is that at the moment of the mini-budget the BoE decided to start unwinding some of the QE and seemed to have forgotten to mention it to the First and Second Lords of the Treasury – Truss and Kwarteng. And it is likely that the drop in the top tax rate – a disgusting move by Brown – the pensions destroyer and awful gold salesman – to annoy the incoming Tories, would actually be at least revenue neutral if not bring in more tax. The Treasury is incapable of understanding the concept of reducing tax rates bringing in more revenue.
“The myth persists – or rather, is perpetuated by a lazy political and media class”
Oh methinks it’s not “laziness” – it’s simply a very convenient way to get rid of your political opponents AND make sure anyone else who might think of trying it gets put right off the idea.
I saw Joe Rogan the other day talk about how he had “f*** you money” – meaning he’s so rich that he can afford to upset people. It seems to me that this should be the aim of a nation state – to be self sufficient enough to be able to say “f*** you” to the “international community”. Russia seems to be able to do that, to an extent. Maybe the USA. Not us. It does fly in the face of something else I believe is helpful – free markets – but there are no solutions, only tradeoffs. The alternative is to have allies you can rely on. Good luck with that, especially if all your “allies” are in lockstep with an agenda you wish to depart from.
I suspect that the same policies would not have been allowed to lead to a meltdown if sunak had already been in charge. In others not laziness, running cover for an opportunistic coup.
It was obvious at the time.
And as usual 2-3 years after the event the conspiracy theorists are proved, once nobody’s listening any longer.
Standard globalist playbook stuff, seen it many times now
We are aware of countries being sanctioned that have somehow upset us. UK apparently sanctions six countries: Cuba, Iran, North Korea, Russia, Syria, and certain conflict regions of Ukraine. USA presumably sanctions many more. The EU is on its 14th or 15th sanction package against Russia.
But it was Liz Truss who sanctioned a British citizen, Graham Phillips, for videos he made in Donbass (they can be watched on https://odysee.com/), reporting on the events there since 2014 – primarily, of course, the destruction caused by Ukraine shelling its own citizens and territory. So Graham had his money seized, all income stopped and so on and so forth. He appealed but his appeal was turned down by the High Court.
There is more than one way to curtail free speech.
She was better than some of the others but it’s a low bar- and let’s not forget she failed the “Covid” test
The second that Truss won her campaign I said to MrsVA, ‘You watch. ‘They’ will now try to get her out, probably by constructing a financial event like a run on Sterling or something similar”.
Somehow, told you so just doesn’t quite cut it.
Liz Truss was trussed like a Christmas turkey.
The establishment hated her because she was going to finish Brexit, start fracking, reduce taxes and power up British industry.
IMHO she would have made a decent, properly conservative PM.
The way the globalist MSM has treated her has been shameful.
Shameful and illustrative.
She did not help herself much with poor performances when asked by the press policy questions to which she should have had ready answers.
As PM she presented like the sexist stereo-typical image of an empty-headed blonde.
Sorry about that to feminists everywhere but she let you all down.
If you are a politician asked fairly basic questions it is 0/10 for not being able to answer them.
Yes, but she walked into a trap and, having spent years as Chief Sec to the Treasury, she really should have seen it coming.
“These hedges—a response to the Bank of England’s chronic error of suppressing interest rates while tolerating above-target inflation—would have imploded eventually anyway as BOE Gov. Andrew Bailey belatedly joined the battle against rapid inflation.” I don’t think there is much argument that it was rates and the direction of rates that played a major factor in the meltdown. But to claim that Truss is innocent is the wrong conclusion. In her position, she should have known that if the market took her budget to mean a larger than expected borrowing program that it might trigger a rates move that would, in turn, be catastrophic for the hedging in the insurance market. You (and others) may (rightly) claim that this hedging was badly constructed and stress tested in the first place. But it was no secret that it existed. That it was ignored or not considered by Truss is a monumental error – and she owns that error. I don’t think the world takes this as an example of a supply-side economics failure. It is seen as a Truss failure (rightly). What the real shame is that the good parts of her supply-side program were never implemented because her ineptitude killed… Read more »
It was pretty obvious that it was the B of E which orchestrated the bond market meltdown.
They were attempting to deflect blame onto a recognisably Conservative PM, on behalf of their Masters in the IMF and WEF, who then got the men they wanted in Office: Sunak and the Bonus Hole.
Truss and Kwarteng hadn’t been in post long enough to actually DO anything since the Queen died less than 48 hours after Truss was appointed PM.
There hasn’t been a solid governor of the Bank of England since Mervyn King. Bailey is a no brain, and before him Carney seemed to be on a mission to destroy the BoE (with his daft green wife).
You have rather censoriously responded to my comment (which said in effect that you’d have to go back to Mervyn King to find a sensible governor of the BoE – and pointing out perhaps a little sharply the shortcomings of Bailey and Carney). The language I used was not harsh given how poorly these two performed. Could you please explain the censorship?
Sounds like a coup to me.
Why does a financial crisis automatically mean a Prime Minister has to go, within days?
Never heard of that before.