Wednesday, March 25, 2009

U.K. Bond Failure - Vigilantes Begin to Show...

How long ago was it that the U.K. began Quantitative Easing? Not very long. And despite their buying, no BECAUSE OF THEIR BUYING, they had an auction fail to find enough buyers yesterday…
U.K. Bond Auction Fails for First Time Since 2002 on Brown Plan

By Kim-Mai Cutler

March 25 (Bloomberg) -- The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.

Gilts slumped after the London-based Debt Management Office, which manages bond auctions on behalf of the Treasury, said investors bid for 1.63 billion pounds of the 40-year securities. The last time the U.K. government was unable to attract enough investors was in 2002 when it tried to sell 30- year inflation-protected bonds.

“This is a warning signal investors are sending to the government,” said Neil Mackinnon, chief economist at hedge fund ECU Group Plc in London, who helps manage about $1 billion in assets and is a former U.K. Treasury official. “Investors are giving the thumbs down to the gilt market.”

Prime Minister Brown’s government plans to sell a record 146.4 billion pounds of debt this fiscal year and as much as 147.9 billion pounds in 2010 as he tries to pull Europe’s second-largest economy out of its worst recession since 1980. Brown’s plan drew criticism yesterday when Bank of England Governor Mervyn King told lawmakers in Parliament in London the government should be “cautious” about spending and deficits.
“Brown’s situation is economically extremely uncertain and highlights how we are now in uncharted territory,” said Mark Wickham-Jones, a professor of politics at Bristol University.

The yield on the 10-year gilt rose five basis points to 3.43 percent by 12:57 p.m. in London. The 4.5 percent security due March 2019 slipped 0.47, or 4.7 pounds per 1,000-pound face amount, to 109.36. The yield on the two-year note rose two basis points to 1.28 percent. Yields move inversely to bond prices.

Past Failures
The U.K. had two failed auctions in the past 10 years, the most recent in September 2002 when the Treasury received bids for 95 percent of the 900 million pounds of the 30-year inflation-protected bonds offered, according to the DMO’s Web site. The other failure was in 1999, when it tried to sell 500 million pounds of inflation-protected bonds.

“The risk of uncovered auctions is a normal part of the process,” said Sarah Ellis, a spokeswoman for the DMO in London. “Today’s auction was at the riskiest part of the curve. An additional factor which may have deterred some bidders is the imminent end of the financial year.”

An official at the Bank of England declined to comment.

Declined comment? I’m sure it’s more like speechless. The bond vigilantes are showing up over there, how long before they show up here?

Here’s a 60 day hourly chart of TLT (20 year bond fund). You can see that we’ve been trapped in a trading range for a month and a half. Every time it reaches that 101 level there’s suddenly buying that magically appears or there’s a statement of some type from the Fed that they are going to begin QE. The recent spike to 108 was on the FOMC announcement, and you can see that we have corrected most of that.

It’s much easier for them to manipulate rates on the short end of the curve, and thus keeping an eye on the relationship between the long and short ends is a must. Mortgage rates are down so much because of the billions thrown at buying up FNM and FRE mortgage paper. The bond market is no longer a free market, and neither is the mortgage market. They are now nationalized, comrade, the invisible hand is temporarily at bay. But don’t lose hope, the reality is that the attempt to manipulate large markets over long periods of time always fail. The market, in the long run, will seek its natural unmanipulated level.