Budget Day!

Published: Wed 15 March 2023
Updated: Wed 15 March 2023
By steve

In Markets.

Good news for the rich and the old

I’ve been too busy to pay much attention to the budget, but I did hear that the chancellor has abolished the upper limit on pension savings. My instinct is that people who already have a million pounds are so in pension savings should not obviously be at the front of the queue to get a handout when the total tax take is at a multi-generational high and public services are (we are repeatedly informed) ‘crumbling.’ My instinct is that this is a political fix to drive a wedge between senior NHS consultants and the rest of the profession to deflect the full impact of the hospital doctors’ strikes. It seems a very expensive way of achieving a modest and uncertain outcome.

Fixed Interest — fixed markets

I remember an article in the FT years ago, where two opposing points of view about fixed income markets were put forward. One argued that inflation and interest rates had been coming down for several decades, but that now we had hit the zero lower bound, interest rates had nowhere to go but up. Correspondingly, bonds had nowhere to go but down, and that as investors started to realize that there would be a classic market crash, where everyone headed for the emergency escape at once, like the bank runs at SVB and Signature that we’ve just seen (although via electronic funds transfer, rather than customers queuing at ATMs).

Well, the other argued that this would not happen, because the marginal buyer of gilts (I think the article was about the UK sovereign market, but it could have applied to almost any other) was not buying them because they represented a good investment. He was buying them because regulation more or less compelled him to buy them. Liability matching for pension funds, heavy risk weighting for almost any other sort of asset for banks, Solvency II etc. essentially forced many institutions to hold gilts against their will, which would prevent any crash. And QE. Don’t forget QE: the Bank of England hoovering up as many gilts as the Treasury can issue.

Well the bullish case won out. We all turned Japanese, and sovereign bond prices continued their upward trajectory for another decade (probably). It’s not really surprising that this has happened. Banks and the finance cabal have terrific political power. Governments want to spend but not tax. Everyone wins when the market price of debt is heavily manipulated. Sort of. Except that the subsidy for borrowers is capitalized into the price of houses, pricing anyone born after 1960 out of the market for a comfortable family home.

Except now, even though real interest rates are deeply negative, entities holding big portfolios of long-dated gilts etc. are looking shaky. Banks have this one weird trick to flatter their balance sheet (by classifying 30 year gilts as ‘Hold to Maturity’). This has worked OK up to now, but at some point people will note that creditors may not want to wait 30 years, because, y’know, inflation at 12% kinda erodes a nominal redemption.

Will this be the end of the endless bull market in bonds? Probably not, but, as Herb Stein once said, “If something cannot go on forever, it must come to a stop.”


Silicon Valley Bank’s collapse into receivership has continued to spook risk markets. Commodities have fallen quite sharply, even as interest rates across the maturity spectrum have fallen. Two year yields have continued to fall fast. The market was moderately convinced that the Fed would pivot six months ago. Now they seem totally certain. They are probably right.

There is still very high volatility in short term interest rates.

Eurodollar futures

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