Wednesday, 13 May 2009

QE - little impact on government debt yields

The impact of quantitative easing on government yields has been minimal. After printing ₤50 billion, the 30 year gilt yield is actually four basis points higher than in early February, when the Bank started its insane policy of printing money.

The most impact has been on the 10-year bond. Its yield has fallen 40 basis points. This contrasts with a 500 basis point cut in the bank rate.

The Bank of England's explanation for this abject failure of QE is ominous. In today's inflation report, it said

"Projections for government borrowing were revised upwards by more than the market expected in the Budget in April, contributing to an increase in expectations of bond issuance; this may have raised yields."

What does this mean? The Bank of England is printing cash to reduce bond yields, and trying to put downward pressure on all interest rates, including those faced by corporate borrowers. At the same time, the government is issuing more debt, pushing yields the other way.

This is policy incoherence; it is fiscal crowding out, and above all it is the road to higher inflation, macroeconomic instability and falling living standards.

Welcome to the mad world of New Labour.


Anonymous said...

You posted something on this a few days ago. Haven't the BoE increased the size of their asset purchases. It sounds like throwing more money after bad.

Anonymous said...

It is 'Operation Trouser It': the rich are taking every penny for themselves to replenish after blowing out their finances in the crash. They are like a giant Dyson, sucking up all cash for themselves. Don't expect to see any help for the guy on the street.

john miller said...

O/T alice for which I apologise, but I thought you may find this interesting.

My son, 25, wants to buy a £180k flat with his girlfriend. they have saved (don't ask me how) £20k for a deposit out of their combined salary of £52k.

The Abbey mortgage rep, on hearing their salary said they would be able to get a £250k mortgage...

However, they would have to provide a 15% deposit on ANY property.

So they can get a £250k mortgage, but not a £160k mortgage on their £180k property.

Basically, the Abbey don't care if the lender gets stuffed, but they do want to make sure that if the Abbey has to sell the propertyfrom under them, the Abbey are in funds.

The lenders obviously want their bubble back.

AntiCitizenOne said...

That sounds like Abbey National is being prudent with it's depositors money.

Alice Cook said...


That is exactly right, they want the bubble back, and they will risk everything to see us return to housing inflation.