-
I don't have time to listen to it at the moment but are you referring to UK government bonds and pension funds?
I wouldn't say "no one understood them" - the BoE specifically stepped in to prevent the situation from worsening. But they do seem to be complicated.
Either way my layman's understanding is:
- The UK government issues gilts which pay X% interest over whatever period of time, which you can buy for a price
- Government announced massive unfunded tax cuts which means they were going to have to borrow loads of money, which means the internet rate on gilts was likely to increase
- Gilt prices dropped off a cliff, because why would you buy a gilt that pays 2% when you can wait a few months and buy a gilt that pays 6% instead?
- Gilt prices falling has massive knock-on impacts on pension funds who rely on gilts and instruments based on gilts to have predictable income/growth
- Pensions were forced to sell off their own gilts to cover their liabilities
- Gilt prices fall even further causing more sell offs.
that no one had told truss & Kwarteng about
Also it's not just the case that no one told them. They deliberately avoided asking for advice from some of the budget/treasury bodies because they knew that what they had planned was bonkers.
- The UK government issues gilts which pay X% interest over whatever period of time, which you can buy for a price
frankenbike-
- Gilt prices falling has massive knock-on impacts on pension funds who rely on gilts and instruments based on gilts to have predictable income/growth
- Pensions were forced to sell off their own gilts to cover their liabilities
This is the important bit. Pension funds were doing weird derivative shit in schemes set up by major banks (LDIs, or liability-driven investments), rather than simply taking the yield from the bonds they already held (the value of which would have increased…), or doing what the financial industry is really meant to do and invest in the real economy.
That process was not properly policed by the Bank of England's financial policy committee.
- Gilt prices falling has massive knock-on impacts on pension funds who rely on gilts and instruments based on gilts to have predictable income/growth
-
Thank you! All v interesting. I will re listen and see how much more I get this time. They made the other good point that the victors write history, and the BoE and treasury have pushed a narrative of 100% on Truss, but it’s more nuanced apparently.
slippers
t.o.
I listened to a series of Robert Peston’s the rest is money (I’ll find a link shortly) on the mini budget. If anyone can listen, understand and explain it to me in simple terms I’d be very grateful, but from memory the gist seemed to be that there were “pools” of invested money that were specifically fucked by the mini budget, and that no one had told truss & Kwarteng about, because no one (eg BoE) understood them either.
This is part 1 of 5