We’re witnessing the further unraveling of the grand experiment of central banks over the past 15 years, originally championed and led by Ben Bernanke. The accidents continue to pile up in its reversal and in response, they can never really leave. In the BoE press release today, “In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses. To achieve this, the Bank will carry out temporary purchases of long dated UK government bonds from September 28th. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.”
Now to avoid the look that the BoE is now conducting a new form of QE, so soon after they ended it and right before they planned on QT via outright sales, they emphasized that “These purchases will be strictly time limited. They are intended to tackle a specific problem in the long dated government bond market…The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.”
With respect to their planned gilt sales, the BoE said it “has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on October 31st and proceed thereafter.” Me: how in the heck are they going to shift from trying to calm markets today via bond buying to selling gilts one month from now?
So, after they ended QE they’ll sprinkle in a little QE right before QT all on top of the rate hikes. Welcome to the Hotel California.
Now it’s easy to think that this is a UK specific event but be sure that this is coming to a US Fed theater near you if this volatility and violence of bond moves continues. I seen now NO chance the Fed gets far with QT, let alone much more with rate hikes.
The pound is selling off on the bond buying plan and on the heels of worries about the Truss tax cuts but it’s not like the US is any more prudent with its budget, especially with the $400b cost of student loan forgiveness without the approval of Congress. And when the IMF criticizes the Truss tax plan, it tells me she’s on to something that will be long term good for the competitiveness of the UK economy. The UK debt to GDP ratio is about 75%. It is 125% for the US. The market and commentary response to the Truss budget is WAY overdone I believe. The US 10 yr yield did kiss 4% just before the news and has now backed off to 3.93%.
Here are the intraday move in 2 yr and 10 yr gilt yields:
2 yr yield
10 yr yield
While the S&P 500 is testing its June lows, the lowest rung of high yield has seen its credit spreads blow out above its July highs. The Bloomberg CCC credit spread index is now at 1150 bps vs 1100 then. That’s the highest since July 2020. It’s wider by 100 bps in the past two weeks.
CCC Credit Spread
Positively, Apartment List.com yesterday released its October National Rent Report and it showed a .2% m/o/m drop in rents in September, “marking the first time this year that the national median rent has declined m/o/m. The timing of this slight dip in rents is consistent with a seasonal trend that was typical in pre-pandemic years. Assuming that trend continues, it is likely that rents will continue falling in the coming months as we enter the winter slow season for the rental market.”
Now be sure, rent growth is still historically heady as they are still up 7.5% y/o/y but that is well down from the 18% pace seen in the beginning of the year. Apartment List went on to say, “This cooldown in rent growth is being mirrored by continued easing on the supply side of the market. Our vacancy index now stands at 5.2%, after nearly a year of gradual increases from a low of 4.1% last fall. That said, today’s vacancy rate remains well below the pre-pandemic norm, and spiking mortgage rates that continue sidelining first time homebuyers could contribute additional tightness to the rental market.” They also said that the slowdown in rent growth “has been geographically widespread.”
As for what this means for the Fed, unfortunately they are conducting policy looking at the backward looking BLS calculations of rent in CPI and PCE. So the rental market is now driving down one side of the street and the Fed and its analysis is driving right by them down the other side of the same street.
With a further rise in the average 30 yr mortgage rate to 6.52%, refi’s fell 10.9% w/o/w and are down by 84% y/o/y. Purchases held in, down just .4% w/o/w but still weaker by 29% y/o/y. No need for added color here.
The Bank of Thailand joins the parade of rate hikes, but they are going slow with its 25 bps move to 1% as expected.
Consumer confidence in Germany and France weakened further as it did in Italy. We should not be surprised but just confirms the tough spot they are in.