From BusinessWeek:
The Bank of England said it plans to sell three-year bonds in dollars to finance its foreign-exchange reserves.
The U.K. central bank hired Barclays Capital, BNP Paribas SA, Goldman Sachs Group Inc. and JP Morgan Chase & Co. to manage the issue, which will be benchmark in size, it said in a statement. The bank paid 106.2 basis points more than Treasuries when it issued $2 billion of three-year notes in March last year, according to data compiled by Bloomberg.
“The notes will likely receive good investor appetite seeing that it’s a AAA rated name,” said Trevor Welsh, a portfolio manager at London-based Aviva Investors, which manages about 10.5 billion pounds ($14 billion) of fixed-income assets. “This bond sale is purely a technical move for the bank’s foreign currency reserves.”
The Bank of England is seeking to raise funds as confidence in the U.K. currency plummets on concern no party will win an outright majority in a forthcoming general election. The pound weakened 7.6 percent against the dollar this year, the worst performer among the 16 major currencies, as traders bet a new administration won’t be strong enough to reduce the nation’s budget deficit of more than 12 percent.
“It will be interesting to see if investors require a slightly higher spread because of sovereign risk,” Welsh said. “But if so, it won’t be more than a couple of basis points.”
The central bank has issued three-year notes in March every year since 2007 to finance foreign-exchange reserves that support its monetary policy objectives, according to the statement.
Make up your own mind whether this means much. Sure, $2 billion is a drop in the ocean, but who's to say it's not the thin end of the wedge? Me, I don't like it. Although to be fair, I ought to seriously consider buying some, just as a hedge...
Via Paul at HPC
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8 comments:
L, the good news is, a UK citizen can now invest in USD with zero counter-party risk.
How?
I might be in for a few quids worth..
This reminds me of some of the good citizens of Poland who took out loans to buy their house in Swiss francs because the interest rate was cheaper. Now that the zloti has crashed against the franc those cheaper interest rates are unpayable (let alone the principal).
They don't say 'being able to borrow in your own currency is a huge advantage' for nothing
Why not invest direct into US Treasuries? That way there is no risk of the counter-party not being able to repay (in $s). UK $-denominated debt bears the risks that the $s will not be there to repay the bond or you'll be repaid in £s at some ridiculous and artificial rate announced by the BoE (like the "official" $/£ rate from 1939-1979).
AC1, I don't know how you buy them.
M, exactly.
U, fair point, but ...
1) If the US wish to default, what are the chances that it will default on foreign held bonds first? In which case you have no chance of getting anything back.
2) yes, UK government might use an artificial exchange rate. But if you hold US bonds, they might introduce currency controls or a super-tax on the interest that comes to the same thing.
MW
If the US defaults on its obligations we're all (financially) dead. Mind you, the look on Chinese faces when their US$trillions bits of paper become worthless would be impressive to behold. However, in reality, to repay $ obligations all the US Treasury has to do (Congress willing) is resort to the printing press. Not a wonderful prospect but, at least, we'd have $s to spend in the US.
BTW, the US government has already defaulted on its obligations - in 1933 - as explained here. Also the British governemt downgrading of War Loan in the 30s was another quasi-default. So this is not exactly untrodden territory.
U, that is also true, but when your USD bond matures, all the UK government needs to do is look up what that day's exchange rate is, print the corresponding amount of £ notes and hand them over, where is the big difference?
And even if you had $ notes in your hand (which you wouldn't), there are still currency controls to worry about (assuming you like worrying about highly unlikely outcomes).
MW
I'm not sure we should expend much more energy on this exchange. One point though: I don't spend that much time worrying about unlikely outcomes (eg the prospect of Cameron winning the election) but if I was going to go long on the $, I would rather have the US government on the hook (even if there is a chance that it might wriggle off it) than the BoE. Of course, if I was going long on the £, I'd rather have the UK government on the hook than the US Treasury.
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