Daily Alert – Wednesday 12th October 2022: Moral hazard vs empty threats

Mark NugentDaily Alert, October 2022

Daily Alert – Wednesday 12th October 2022: Moral hazard vs empty threats

Good morning.

Bank of England (BoE) Governor Andrew Bailey extends the scope of the current emergency bond buying to include index-linked bonds, but maintains the original end point, which is Friday. Yes, this Friday. “My message to the funds involved and all the firms involved with those funds is: You’ve got three days left. You’ve got to get this done. Because again, part of the essence of a financial stability intervention is that it is clearly temporary.”

Is this an empty threat? Is he bluffing?

The GBP falls and there’s a bond sell-off because if you cannot sell your bonds to the BoE, you don’t want to be the last guy at the bond fire-sale party when all the buyers have gone home.

Then an article appears in the Financial Times (FT) saying the BoE will decide whether to extend the facility on Thursday or Friday. “The central bank is assessing whether affected liability-driven investment managers have built up enough cash reserves to meet margin calls” the newspaper said. The GBP stabilises and bonds calm down.

So, Bailey is bluffing?

Now let’s be under no doubt, this fiasco started with Truss and Kwasi, but can the BoE make it worse? Should Bailey have his Draghi moment where the President of the European Central Bank declared he would do “whatever it takes” to save the Euro in 2012.

Or is that moral hazard?

Anyway, a single FT article seems to be holding the ship together. What a state of affairs.

No trades for me last night. I’m going for a lie down.

I’ll be back tomorrow.

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