The brazen talk from BoE’s Bailey yesterday afternoon, stating with conviction that the “temporary” bond-buying program would in-fact end this Friday on original deadline and risking an upgraded ‘left-tail’ rates calamity through accelerated asset liquidations in a tight window, was not simply an ‘avoidance of moral hazard’ exercise from the BoE head – where the central bank would again be ‘on the hook’ to backstop Funds needing to get their liquidity / cash ‘houses in order’ and appropriately deleveraged in short-order, versus the BoE sole-priority on continuing their fight against inflation as lone mandate.
Instead, writes Nomura’s Charlie McElligott this morning, the comments were (admittedly dangerous) gamesmanship from the BoE head back to the Truss’ government, a high risk “game of chicken” which is saying, “I’ll let markets dictate to you whether you and your budget survive” – and effectively saying that the blood will be on the Government’s hands if there is a pension disaster which will then require a later ‘bail-out’.
The Nomura strategist’s view of this 3-D Chess game being played by Bailey to force the death of the Truss / Kwarteng budget is somewhat confirmed by the price action in UK bonds and cable this morning – simply put, it’s not a bloodbath…
Gilt yields are up modestly…
Linkers are ‘steady’…
And cable is stronger…
Simply put, Bailey’s somewhat out-of-character directness overnight – which was met with reports by The FT that The Bank of England has signalled privately to bankers that it could extend its emergency bond-buying programme past Friday’s deadline, which was then immediately denied once again by BoE, confirming the deadline is now 2 days and counting – is “risking the LEFT TAIL” to increase the potential that the Truss administration / Chancellor Kwarteng are forced to either reverse or modify the unfunded tax cuts budget plan, and / or even outright resign, on broad-based “no confidence” vote from Global Markets and the UK Public.
And As McElligott further explains, that outcome – a culling or outright u-turn of the planned unfunded tax cut budget plan, and / or straight-up resignations from the government – would then be the mega “RIGHT tail” for Global Markets which has been reeling ever since the shock budget announcement was first made a few weeks ago, as it would take tremendous pressure off of Gilts and Sterling after acting as the “pressure release valves” for the incoherent meshing of exceedingly tight monetary policy running simultaneously with irresponsible fiscal largesse, of course then risking the potential for enormous squeezes across heavily-shorted Global Equities and Global Rates / Bonds thereafter in substantial RELIEF RALLY, as after all, this latest spiral in global markets did in-fact accelerate due to the UK fiscal gong-show adding gasoline to the inflation fire.
One additional underappreciated fact is that despite the ongoing “will they, won’t they” on the bond-buying program extension (or not) is that the expanded Collateral / Repo Facility WILL still be in-place and help funds address liquidity issues.
But in the Nomura strategist’s eyes, it is the very risk that the “LEFT tail” of dire Market Vol >> Systemic Pension meltdown counter-intuitively then increases the probability of a “RIGHT tail” Market outcome in an outright dumping of the Truss / Kwarteng budget’s unfunded tax cut plan – which is why today we see the market acting so “orderly” and not coming unglued as most expected, instead, with the Gilt strip UP by-and-large on the day now along with US Equities futures.
So the point here is again just how critical this “left tail threat >> right tail outcome” scenario could help break the cycle of some of this global “forced selling” feedback loop via stabilizing Fixed-Income, and allow markets to get back to the actual forward inflation data.
So who will blink first – Bailey or Truss… or the market?