The UK’s gilt trip continues

This is an audio transcript of the FT News Briefing podcast episode: The UK’s gilt trip continues

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, October 12th, and this is your FT News Briefing.

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Marc Filippino
Ukraine’s leader is pleading for more air defence systems. The Bank of England says it’s getting out of the gilt market at the end of the week as planned. No extensions. And US banks will start rolling out their latest earnings reports. Things aren’t looking too bad.

Joshua Franklin
What’s challenging for banks is that banks stock investors, in the words of one analyst, they’re never a group to enjoy the moment.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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Marc Filippino
Ukraine’s president Volodymyr Zelenskyy yesterday urged G7 countries to send air defence systems more quickly. He said this at a video conference a day after more Russian missile strikes hit civilians and infrastructure targets in Ukraine. Zelenskyy said Russia fired more than 100 cruise missiles and launched dozens of drones over the past two days. Russia’s president Vladimir Putin said the strikes were retaliation for a recent attack on a railway bridge connecting Russian-occupied Crimea and the mainland.

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Marc Filippino
The Bank of England yesterday warned of dysfunction in the UK government bond or gilt market and it intervened for the second-straight day, buying up government bonds to prop up prices. It’s all part of the central bank’s £65bn plan to steady gilts after the market tanked in reaction to the government’s mini-Budget. Adam Samson is our markets news editor. He joins me now with the latest. Hey, Adam.

Adam Samson
Hey.

Marc Filippino
So Adam, what’s been going on the past few days? Is this Bank of England intervention different than the one that we saw a few weeks ago after that bond market sell-off?

Adam Samson
Yeah, I mean, it’s all kind of part of the initial intervention. So on the 28th is when they said, look, we’re going to do this £65bn bond buying thing. Since then, they’ve sort of been basically just tweaking that to try to make it work. And it’s just not sticking. It’s not really coming to market as much as they’d hoped.

Marc Filippino
And why isn’t the plan working? Why are gilt investors still so jittery?

Adam Samson
Well, I think people the biggest issue is that they put a deadline on it. It ends on Friday. And that’s really freaked the market out because people are saying pension funds, which have been at the centre of this turmoil because of these complex derivative strategies that they had in place, don’t have enough time basically to fix those strategies. And because of that, there’s a fear that these fire sales that prompted the initial intervention on September 28th are just going to pick up again on Friday. And in fact, we’ve already seen gilts sign off pretty severely repeatedly over the last couple of days. They sold off quite a bit on Monday. Pretty much everybody is saying that we should at least be seriously considering extending the bond purchases past Friday if they want more durably soothe markets.

Marc Filippino
Couldn’t they extend the programme and buy bonds even after the Friday deadline? And if they could, would there be any drawbacks?

Adam Samson
Yeah, I mean, they certainly can do from a technical perspective. There’s no reason they can’t. The problem that they have is they want to tighten monetary policy because inflation here is 10 per cent. They’ve been raising interest rates. They were planning on beginning to sell bonds through a programme called quantitative tightening. So having to buy bonds like this really, really goes against what their monetary policy stance is. And they’ve tried to be very, very clear that this is purely a financial stability operation, that this is not a monetary policy thing. And the problem is, if they just have a big open-ended bond-buying programme, it’s going to start looking a whole lot like monetary policy and that creates a lot of problems for them. And it could cause other problems too. For instance, if they look like they’re getting lax on fighting inflation, it could put sterling under more pressure. And sterling obviously had a terrible time already this year. So to some people, this looks a lot like quantitative easing, which is literally the opposite of what they want to be doing in their fight against inflation.

Marc Filippino
Now, Adam, does this put any more pressure on Prime Minister Liz Truss and Chancellor Kwasi Kwarteng to pull back on the most controversial part of their mini-Budget, the tax cuts and the debt the government would have to take on because of the tax cuts. That’s really what set off this chain of events here.

Adam Samson
Yeah, definitely. I mean, that’s sort of the key here is the real volatility in the UK government bond market started after the Budget on September 23rd. That’s when yields really started rising on gilts. It was concerns about whether they were putting the economy on an unsustainable fiscal path. And it has certainly put the government under considerable pressure to at least, if nothing else, explain how they’re going to improve the fiscal situation. They said that they will unveil a debt-cutting plan on October 31st, but there’s really significant doubts about the extent of the government’s ability to really do these really, really big tax cuts and still keep the economy on a good fiscal path.

Marc Filippino
Adam Samson is the FT’s markets news editor. Thanks, Adam.

Adam Samson
Thanks very much.

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Marc Filippino
US banks reported third-quarter earnings this week. Some of the biggest, including Citi, JPMorgan Chase and Morgan Stanley, released their reports on Friday. The FT’s Josh Franklin says analysts are expecting banks to set aside more than $4bn to cover potential loan losses.

Joshua Franklin
That’s partly reflecting on just banks making more loans. The more loans you make, the more provisions you have to make. But also it reflects the uncertainty about the economic environment in the next 12, 18 months. Right now, in public comments, banks have been saying that the credit environment is remarkably strong and still is strong, and remains better than than before the pandemic. But there’s lots of expectations that that will eventually normalise, especially as we go into choppier economic waters.

Marc Filippino
Yeah. This week, the head of JPMorgan Chase, Jamie Dimon, warned that the US could be in a recession somewhere between six and nine months from now. We also heard from the International Monetary Fund and the World Bank both offered up really gloomy outlooks. And on top of that, bank stocks, collectively, big US bank stocks are down more than 20 per cent on the year. Is there any good news potentially coming out of this most recent quarter?

Joshua Franklin
Well, the good news is that for banks like JPMorgan and Bank of America, which make a lot of money from lending, that should look great this quarter. And a lot of analysts are expecting that that some of these banks may, in fact, increase their guidance when it comes to so-called net interest income or lending revenue that the banks make for the year. What’s challenging for banks is that banks stock investors, in the words of one analyst (Laughter) I was reading from last week, they’re never a group to enjoy the moment, and they’re always looking at kind of the downside and whether or not things have peaked. And there’s a feeling that 2022, certainly when it comes to rising interest rates, really might represent peak earnings for the banks. So there’s not a great incentive to hold bank stocks right now, and that’s definitely reflected in the share price.

Marc Filippino
Josh, is there anything that you’re keeping an eye on this week?

Joshua Franklin
Two other points that I’m keeping an eye out for. One is what banks say around managing costs, obviously going into a potential downturn. And when dealmaking activity has slowed a lot, that does focus the mind about potential job cuts, which is by far the biggest expense that banks have is is the people. And then the other one is in the leveraged lending activities that a lot of these banks do, so helping provide financing for leveraged buyouts and things like that. A lot of the deals that were agreed earlier this year when credit conditions look much better, have now soured a little bit. So whether or not banks are going to be nursing any losses from from these deals.

Marc Filippino
Josh Franklin is the FT’s US banking editor. Thanks, Josh.

Joshua Franklin
Thanks, Marc.

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Marc Filippino
Before we go, Nasa last month launched a mission to smash a spacecraft into an asteroid to try and change its direction. The results are out and they’re even better than expected. It’s the first time humans have deliberately changed the path of a celestial object. The hope is that this deflection technology could be used in the future to prevent a cataclysmic asteroid collision with Earth. Yes, kind of like in the movie Armageddon.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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