The View From The Bridge

Moral hazard or paranoia – January 21st 2013

The Bank of England has purchased 50% of the gilts issued since 2009 and owns 32% of the whole gilt issuance currently in existence. Do you think this has something to do with yields being down at all time lows? Assuming we had access to a printing press it would be illegal if we tried to pull the same stunt. Compared to the Fed, the BoJ and the ECB the UK is almost a minor league player in this systematic global rigging of sovereign debt markets.  The definition of moral hazard has changed over time. It used to refer to the bailing out of “lesser” banks and “minor” economies, which just encouraged others to carry on regardless. Now we have the wholesale support of major economies, their governments and banking overlords to the detriment of anyone else. Government securities used to be the home, during periods of market unrest, for flight to safety investors and others of a cautious disposition. They were also the marker for the risk free rate when calculating the value of equity markets and other instruments. As an aside would the LIBOR scandal have happened if we had had a properly functioning bond market? Hmm.  On the basis that most sovereign debt issues produce a negative real yield to redemption, investors are being “encouraged” to search for income elsewhere. High yielding…

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