Speaker 1: Hello, and welcome to another episode of the Odd Blots podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't all Joe? We
Speaker 1: need to talk about the UK? Yeah, we definitely do.
Speaker 1: You know. The last couple of weeks, of course, have
Speaker 1: been consumed by the volatility and the pound and the
Speaker 1: guilt market. And I think it's actually good that we
Speaker 1: waited a few days. Maybe it'd a been fun to
Speaker 1: do one right away, but there's so much confusion that
Speaker 1: I actually think for learning something, it kind of helps
Speaker 1: to avoid it a feed. That's my excuse. I'm going
Speaker 1: to start this conversation with a massive caveat, which is
Speaker 1: we are recording on October three. Things can change in
Speaker 1: the couple of days that it takes us to get
Speaker 1: this out, and already things have changed quite a bit.
Speaker 1: So you know, the week before we recorded this, we
Speaker 1: saw massive movements in the UK market. So we saw
Speaker 1: five year guilts at like four point seven percent, which
Speaker 1: was the highest, and two thousand and eight we saw
Speaker 1: an even bigger move in longer dated guilts. I think
Speaker 1: the twenty year was almost five percent. It's now back
Speaker 1: below four percent. The pound reached a record low against
Speaker 1: the dollar. All of this was after the UK unveiled
Speaker 1: a mini budget that featured a bunch of tax cuts
Speaker 1: that were expected to balloon the public deficit at a
Speaker 1: time of inflationary pressure in the UK. Joe, I'm just
Speaker 1: going to make that point. But even then, you know,
Speaker 1: in the one week since all of that happened, we
Speaker 1: now have the UK Prime Minister was trust coming out
Speaker 1: and basically doing a U turn on one big component
Speaker 1: of the mini budget, which was the tax cuts, And
Speaker 1: so we're seeing some relief in the market, but there's
Speaker 1: still this big question over what exactly just happened, right,
Speaker 1: and so it really I mean, the story kind of
Speaker 1: started on September twenty three when those tax cuts were announced.
Speaker 1: It really started accelerating in the middle of the following
Speaker 1: week the Bank of England was forced to essentially enter
Speaker 1: the market. And when you have these big in government
Speaker 1: bond there's always this debate, and you've written about it
Speaker 1: for years. Another context, it's like how much is quote
Speaker 1: fundamental and how much is technical? How much does it
Speaker 1: have to do with market structure verse some sort of
Speaker 1: like meaningful signal about the path of expected inflation or
Speaker 1: the Bank of England policy rates and at times there
Speaker 1: is a deviation, and it seemed at least at one
Speaker 1: point last week that there was a pretty big deviation
Speaker 1: between something like fundamental versus this sort of like technical
Speaker 1: driven market that may have been causing a run of
Speaker 1: sorts in at least one quarter of the market. Right,
Speaker 1: So we are going to be getting into this technicals
Speaker 1: versus fundamentals question with really the perfect the perfect guest.
Speaker 1: We're going to be speaking to Toby Nangel. He is
Speaker 1: an economic and markets commentator who worked in asset management
Speaker 1: for twenty five years, formerly the head of global asset
Speaker 1: Allocation for Columbia thread Needle, also a previous All Thoughts guest,
Speaker 1: and someone who is quite philosophical at times over money
Speaker 1: and what mark, but also apparently can get technical to
Speaker 1: combine the philosophy with the technical, which is a rare combination.
Speaker 1: So I'm looking forward to this conversation. Toby, Thank you
Speaker 1: so much for coming on our bots, Thanks for having me.
Speaker 1: So maybe a basic question to start off with, but
Speaker 1: how remarkable were the events of the previous week or
Speaker 1: so in your mind? Oh my goodness, yeah, I mean
Speaker 1: for the guilt market, There's nothing like that in my career,
Speaker 1: and I was looking back using Bank of England data
Speaker 1: and you can't really find something like it. For the
Speaker 1: part well since the daily data that they have there
Speaker 1: to have the short guilt market completely repriced the Bank
Speaker 1: of England rate path in the way it did. And
Speaker 1: then also the long end kind of go from this
Speaker 1: big bear flattening into this huge bear steepening as you
Speaker 1: had liquidation trades and a and a run dynamic unfold
Speaker 1: with the Bank of England than having to intervene to
Speaker 1: start buying bonds when it's trying to do QT. I
Speaker 1: mean it, there's nothing like it. It's really an extraordinary episode.
Speaker 1: We need to uh talk to Richard Silla, who you
Speaker 1: know history of interest rates going back to two thousand.
Speaker 1: That was one of our first episodes to find something comparable.
Speaker 1: It sounds like it really was wild. And all someone
Speaker 1: has to do is look up a chart of like
Speaker 1: tenure guilt or anything and you just see these multi
Speaker 1: standard deviation moves that are supposed to happen like one
Speaker 1: every hundred thousand years happening a few days. But before
Speaker 1: we even get to like what was really driving last week,
Speaker 1: I'm curious, like in the weeks Prior to this, it
Speaker 1: appears we've been seeing this deterioration of market liquidity, pretty
Speaker 1: big sell off in government bond markets around the world,
Speaker 1: strains starting to emerge with so much tightening from central banks,
Speaker 1: Like going prior to September twenty three, the day of
Speaker 1: the mini budget, what we're conditions like, what was trading
Speaker 1: like in your view in government bonds? So, I mean,
Speaker 1: you quite right. It's in an environment of rising bone
Speaker 1: yields around the world, driven really by by the FED,
Speaker 1: but also what's going on the e CP and what's
Speaker 1: anticipated to happen in the UK. From what I understand,
Speaker 1: I mean, liquidity hasn't been amazingly good, but there was
Speaker 1: nothing that I heard that was pointing to a complete
Speaker 1: collapse or anything like that. I can see Joe is
Speaker 1: setting up his his argument for later. It turned out
Speaker 1: everything was fine. I have no argument anymore. Okay, okay.
Speaker 1: So the Bank of England stepped in, which provoked a
Speaker 1: whole bunch of commentary about things like fiscal dominance, and
Speaker 1: the accepted explanation or narrative for why they stepped in
Speaker 1: now is because something was going on with pensions and
Speaker 1: basically we were getting this sort of like self fulfilling
Speaker 1: cycle of yields going up, pensions having to sell stuff
Speaker 1: off and then yields go up more. Can you walk
Speaker 1: us through exactly what the issue was there? Yeah? Sure.
Speaker 1: So in the UK market as the management market, the
Speaker 1: biggest segment by by far, something's called liability driven investment
Speaker 1: or l d I. And to understand that you have
Speaker 1: you need to kind of rewind. Probably about twenty five
Speaker 1: years there were these moves in the way of this
Speaker 1: guy called Robert Maxwell, who's probably best known today in
Speaker 1: the North American audience for being Jolne Maxwell's father. He yeah,
Speaker 1: so he ran a media empire, the Mirror Group, and
Speaker 1: before he fell off his yacht and drowned near the
Speaker 1: Canary Islands, he'd fraudently taken hundreds of millions of pounds
Speaker 1: from the Mirror Group pension scheme, leaving those pensioners basically,
Speaker 1: you know, without a pension. So it's a huge scandal
Speaker 1: caused of bankruptcy of that media empire and a big
Speaker 1: bailout of the Mirror pension scheme. So then you kind
Speaker 1: of bring in this minimum funding requirement for UK pensions.
Speaker 1: At the same time, accountancy standards are changing. You have
Speaker 1: this thing called FRS seventeen, which goes to f RS
Speaker 1: one or two in the in the UK, or International
Speaker 1: Accounting Standard i S nineteen for global, which kind of says,
Speaker 1: do you know what a pension is? Sort of like
Speaker 1: a deferred piece of payment for an employee. It's like
Speaker 1: a it's like a long series of zeros, right a lot.
Speaker 1: I mean, as in a long zero coupon bonds, So
Speaker 1: we should probably value them like long zero. So we
Speaker 1: get a bunch of actories to work these things out
Speaker 1: and then discount them back using bondials. So suddenly, you know,
Speaker 1: you had financial statements that were full of fluctuating pension
Speaker 1: fund mismatches of assets and liabilities, and at the same
Speaker 1: time you had this regulatory pressure to say, you know,
Speaker 1: you probably don't want to have your pension fund hugely underfunded.
Speaker 1: You can invest in anything you want, but if you've
Speaker 1: got a big funding deficit, then you've got to present
Speaker 1: a recovery plan, which might mean over that period you
Speaker 1: can pay no dividends, you can't do em any m
Speaker 1: and a we might say you can't change people on
Speaker 1: your board. All these kind of things that firms don't
Speaker 1: want to do, and so firms go, well, how do
Speaker 1: we deal with this? And number one, they kind of
Speaker 1: shut down their pension schemes for new entrance, and number
Speaker 1: two they look to better match their assets and the liabilities,
Speaker 1: their liabilities looking bond like. So this is kind of
Speaker 1: like the deep history of it. Now, what's has got
Speaker 1: to do with derivatives? And last week, well pretty much
Speaker 1: almost every pension fund couldn't quite afford to match their
Speaker 1: assets and the liabilities. So what they do instead is
Speaker 1: they they have a growth portfolio which is kind of
Speaker 1: low volatility that they should beat cash over time, and
Speaker 1: then they've got a matching portfolio and that might be
Speaker 1: long data guilts. Now the liabilities look a lot like
Speaker 1: long dated guilts in so far as a long dated
Speaker 1: about twenty five year duration instruments, right, but they might
Speaker 1: only have like in the matching assets and in low
Speaker 1: volatility growth assets. So what they do is they put
Speaker 1: an overlay over the rest of it, using swaps or
Speaker 1: doing kind of repo on that on that matching portfolio
Speaker 1: to to to generate leverage. And the leverage varies a lot,
Speaker 1: like you know, it would be up to like of
Speaker 1: a four four times for the larger schemes. What gets
Speaker 1: through the mechanics? Actually, yeah, what happened, Setting aside the
Speaker 1: craziness of last week, what happens mathematically for the pensions
Speaker 1: when rates go up as they have been this year. Okay, okay, yeah,
Speaker 1: So if you have a pension fund, it's called assets,
Speaker 1: which will be financial securities and other stuff, and then
Speaker 1: we have liabilities. So let's say at the beginning of
Speaker 1: the year, your pension fund and your assets are one hundred,
Speaker 1: and your liabilities are hundred long dated bond yields rise up,
Speaker 1: you know, a lot. Let's say there rise a hundred
Speaker 1: basis points in your and your and your liability to
Speaker 1: got duration. So now your liabilities are only seventy five
Speaker 1: in present value terms. Now your assets they would have
Speaker 1: maybe fallen a bit because great hasn't been fantastic, but
Speaker 1: also on the on the liability side, those guilts have
Speaker 1: been worth less, and then the swap overlay is worth less.
Speaker 1: So what mathematically will have been happening during the year
Speaker 1: is it pretty much every month they'll probably be rebalancing
Speaker 1: so that they get back to being fully hedged and
Speaker 1: they don't have any kind of crazy stuff going on.
Speaker 1: So Just to be clear, the value of the assets
Speaker 1: has in a rising rate period, the value of the
Speaker 1: assets has fallen, but if it's orderly, it's okay because
Speaker 1: by the accounting standards, the total value of the obligations
Speaker 1: has fallen as well. Absolutely. I mean, we think of
Speaker 1: pensions as investors, but what they're really trying to do
Speaker 1: is they're trying to solve their problem. And their problem
Speaker 1: is that they don't want to leave their beneficiaries with
Speaker 1: an unsecure outcome, right, So that means that they don't
Speaker 1: go around going, oh, how do I duce a little
Speaker 1: bit more out of this? Or that they're thinking how
Speaker 1: can I get my funding ratio into a better place,
Speaker 1: And if they've got their funding ratio in a great place,
Speaker 1: then they don't really care what yield are doing. So
Speaker 1: this is like, you know, it's fine ld I works
Speaker 1: fine in low yield environment, it works fine, and high
Speaker 1: yeld environment it doesn't work fine if you move from
Speaker 1: a low yielding environment to high yelding environment super super quickly,
Speaker 1: And maybe we should have a look at them account
Speaker 1: to that. Well, So this was going to be my
Speaker 1: next question, what exactly how happens in that scenario when
Speaker 1: you get a sharp move or yields move very quickly.
Speaker 1: And when you have that type of volatility, is it
Speaker 1: a problem because of the optics related to the pension fund?
Speaker 1: You know, no one wants to say that they're underfunded
Speaker 1: and then have a bunch of press written about that,
Speaker 1: or be restricted in what they can do going forward,
Speaker 1: or is it a problem in terms of technical stuff
Speaker 1: that they have to do, like stump up more collateral
Speaker 1: to cover some of those swaps that you just described. Okay,
Speaker 1: it's it's the second one. But also importantly, in a
Speaker 1: thing which hapn't said yeah far, it's quite important, is
Speaker 1: that they tend to actually be underhedged. So rising yields
Speaker 1: actually helped their funding ratios, so that that kind of
Speaker 1: hypothetical scheme in the beginning of year, which had a
Speaker 1: hundred assets and hundred liabilities now has seventy five liabilities.
Speaker 1: It might actually have eight assets rather than and so
Speaker 1: it's actually in a much much better funding ratio than
Speaker 1: it was before. There's this being windfull gain that's come
Speaker 1: through even though the assets are fallen. Right, it's winning
Speaker 1: if you like. So from the optics, the optics are good,
Speaker 1: but then there can be the mechanics and like really annoyingly,
Speaker 1: there are kind of three different ways at least which
Speaker 1: they kind of implement, but let's just focus on Let's
Speaker 1: focus on like two max. Ok So, one of which
Speaker 1: is that they they implement directly, so they have that
Speaker 1: matching pool of assets like guilts and then the growth
Speaker 1: pool with like a swap overlay or repo on on
Speaker 1: the matching assets. Now they've effectively got gearedlong data guilts,
Speaker 1: and when guilt prices fall a lot very quickly, that's
Speaker 1: gonna make the collateral worthless. Also, the P and L
Speaker 1: on the derivative overlay will be sharply into negative, so
Speaker 1: you're going to have to put up more collateral and
Speaker 1: the collatteral is worthless um and and so that's gonna
Speaker 1: be a problem that there's going to be liquidity situation there.
Speaker 1: It's not a funding solvency or funding ratio issue, but
Speaker 1: there's a liquidity problem there. So that's that's one route.
Speaker 1: The second route is something which I think a lot
Speaker 1: more schemes have had problems with, which is a they're
Speaker 1: not big enough to have is doas in place with
Speaker 1: the counterparties and then having like swaps going place. So
Speaker 1: what they do is they go to a an asset
Speaker 1: manager that has a solutions are and and the asset
Speaker 1: manasion says, you know, I'll tell you what. We'll take
Speaker 1: a hundred pounds and we'll put seventy five pounds in
Speaker 1: this growth portfolio, and we'll put twenty five pounds in
Speaker 1: this pooled leverage matching fund which has all the leverage
Speaker 1: within it and there's nothing outside that along with like
Speaker 1: a hundred other pension schemes. Now, if you as a
Speaker 1: pension scheme with your hundred pounds, you've got liquidity to
Speaker 1: make sure that you can put in more collateral if
Speaker 1: you need to, because you know your your funding ratio
Speaker 1: is improving. This is great, and so you all set
Speaker 1: up fantastically. But maybe some of those other schemes they
Speaker 1: don't have liquidity. Maybe they're invested in private credit or
Speaker 1: infrastructure or other long term types of things which don't
Speaker 1: have great liquidity. Now, if the asset manager says, okay,
Speaker 1: you know, we've we've got we've got to recapitalize nation events,
Speaker 1: so you need to transfer more funds in, then they're
Speaker 1: unable to do anything about it. And so they heads
Speaker 1: just starts to fall away, even if the whole structure
Speaker 1: within those pool funds is maintained. But the asset manager
Speaker 1: sometimes might even kind of go, do you know what, Like,
Speaker 1: you know, we're not going to get recapitalization for most
Speaker 1: of these, we might just decide to deliver them ourselves.
Speaker 1: And that's what you saw, I think one of the
Speaker 1: announcements over we can come out from a large asset manager.
Speaker 1: I just have a million questions, but I'll start and
Speaker 1: just to sort of recap what you're saying. You know,
Speaker 1: sometimes in market, sometimes I'm skeptical of it, but sometimes
Speaker 1: in market people make a distinction between a liquidity crisis
Speaker 1: and a solvency crisis. And so just to be clear,
Speaker 1: what you described is it seems like a fairly clear
Speaker 1: example of what should be categorized as a liquidity crisis,
Speaker 1: because in some cases maybe the move and rates improved
Speaker 1: the overall solvency and created a gap between the value
Speaker 1: of the assets today and the applic asians, but the
Speaker 1: mechanics of it, and you just you know, there were
Speaker 1: several different avenues. This really sounds like liquidity was the
Speaker 1: key issue here. That's absolutely right, Joe. And moreover, the
Speaker 1: only route for liquidity for some of these was actually
Speaker 1: selling long dated guilts or unwinding long dated swaps, which
Speaker 1: which kind of then then boils down to like you
Speaker 1: know this the Bank of England when they intervened, they
Speaker 1: weren't doing it to bail out pension schemes. It might actually,
Speaker 1: I think, I think, actually genuinely it will have disadvantaged
Speaker 1: large numbers of pension schemes materially by their actions. It tracy,
Speaker 1: you know, I'm thinking it feels like this is actually
Speaker 1: a common theme this year, and I'm thinking, like some
Speaker 1: of the commodity volatility that earlier in the year, where
Speaker 1: you have these commodity producers they were actually benefiting from
Speaker 1: a sort of solidcy basis by the fact that commodities
Speaker 1: were surging, but due to the funding cost of their hedges,
Speaker 1: were risk of going bankrupt despite favorable commodity right, and
Speaker 1: also just the pro cyclicality of margin calls, which is
Speaker 1: something we also saw in the commodities market. Okay, So
Speaker 1: on that note, Toby, you just mentioned the BOE coming in.
Speaker 1: What exactly did they do first off, and is it
Speaker 1: quie or not and why does it matter? And then secondly,
Speaker 1: what impact has that had on the pension fund. So
Speaker 1: you mentioned that it might actually have been negative for
Speaker 1: them in terms of a funding perspective, but it would
Speaker 1: have broken the liquidity margin called doom loop that you
Speaker 1: just described. Yeah, that's that's right. So the Bank of
Speaker 1: England they saw that this doom look was in place
Speaker 1: and that you don't know where that's going to lead, right,
Speaker 1: that could that could undermine the entire financial system. So
Speaker 1: they intervened with an announcement that they would do daily
Speaker 1: auctions of up to five billion pounds each in long
Speaker 1: dated securities, and they did their first auction and I
Speaker 1: think it was like just over a been was was
Speaker 1: was offered, but the announcement just collapsed long yields by
Speaker 1: a hundred basis points, I mean a huge move. I mean,
Speaker 1: if you've got twenty five year duration in this stuff,
Speaker 1: that's a percent price jump just on the announcement, which
Speaker 1: is just phenomenal. So so that's what they're technically doing.
Speaker 1: Is that quee um. I think that technically you could
Speaker 1: talk about it as balance sheet enlargement, but I think
Speaker 1: it's it can only be understood as a lender of
Speaker 1: last resort, or rather market maker of last resort function
Speaker 1: that it's stepping in to do. It's protecting the financial system.
Speaker 1: It's not trying to reverse QT in it anyway. And
Speaker 1: you know, I think actually it was. They executed it
Speaker 1: and the results are probably way beyond their expectations. And
Speaker 1: then the second question was about like what was the
Speaker 1: impact on pension funds. Well, some some of these these
Speaker 1: pension funds will being cleared out of their hedges, whether
Speaker 1: through their choice or through their managers choices, up when
Speaker 1: long dated yields were above five percent. And so if
Speaker 1: you think of that, you know that fund that's feeling
Speaker 1: really great because it's it's assets are fallen by year
Speaker 1: to day, but it's liabilities are down twenty five year
Speaker 1: to date, and you have like the assets and liabilities
Speaker 1: going up and down in this roller coaster together. Well,
Speaker 1: the assets just fell out when the game unbledged and
Speaker 1: the liabilities rose back up hugely after the Bank of
Speaker 1: England intervention. And so that windfall gain which might have
Speaker 1: come from rising yields, because that's a little bit under hedge.
Speaker 1: I don't know the impact like system systemically, and I
Speaker 1: don't think anyone knows the impact systemically yet as see
Speaker 1: what the hits being for them. Hopefully it's small. I
Speaker 1: think in the macreconic terms it will be small, but
Speaker 1: it will be hugely painful for for a number of schemes.
Speaker 1: So I'm thinking back to in the US in UH
Speaker 1: and I guess elsewhere, but in the US and spring
Speaker 1: on set of the pandemic, and it was a similar
Speaker 1: situation with leverage hedge funds that are cash treasuries versus futures,
Speaker 1: and the FED head to step in and restore calm
Speaker 1: to the market. And then you know that people have
Speaker 1: talked about the idea of like a standing repo facility
Speaker 1: such that at any given time you can just get
Speaker 1: liquidity for what, within any given systems should be the
Speaker 1: safest most liquid asset. Would something like that in the
Speaker 1: UK had it? Is there anything equivalent to that in place?
Speaker 1: Or would something like that be useful such that the
Speaker 1: central bank doesn't have to make ad hoc decisions about
Speaker 1: when to step in, but allow players to at any
Speaker 1: time get central bank liquidity for their guilt. So I
Speaker 1: don't think that there was I mean, I could be wrong,
Speaker 1: so I'm gonna caveat that, but I don't think that
Speaker 1: there was a problem about getting liquidity feel guilt. I
Speaker 1: don't think that people were wondering, you know, how do I,
Speaker 1: how do I get finance for this. It's more that
Speaker 1: owing to the structure of the leverage, the value of
Speaker 1: the guilts had had reduced such that, you know, they
Speaker 1: just didn't have enough collateral. I mean, consultants will we
Speaker 1: talked about you know, I was speaking to a c
Speaker 1: i OVA of an investment consultant for a piece I
Speaker 1: read in in July setting up this whole yeah, concern
Speaker 1: about l d I. And he told me, listen, one
Speaker 1: of my clients had one point five billion pounds of
Speaker 1: excess collateral when guilt yields were down at the lows
Speaker 1: during the pandemic. They've now got zero and they need
Speaker 1: to get another billion pounds collateral call to come through,
Speaker 1: so they're selling things that was in June, right, that
Speaker 1: was the effect of what had happened through then. So
Speaker 1: you had let's say that twenty five which was guilts,
Speaker 1: you might have only needed ten to put in that
Speaker 1: pot for collateral, and that then fifteen could have been
Speaker 1: excess collateral. Then you know, as as yields rise, so
Speaker 1: your excess collateral shrinks down and then you need to
Speaker 1: replenish it, you need to rebalance. And these things can happen,
Speaker 1: you know, they can. It can cause a little bit
Speaker 1: of strains on the system. But they can happen over months,
Speaker 1: but they can't happen over forty eight hours. So speaking
Speaker 1: of collateral calls, which is basically a synonym for forced deleveraging,
Speaker 1: I know, we we talked about the sort of doom
Speaker 1: loop of you know, yields going up and so pension
Speaker 1: funds have to sell more guilt and then that forces
Speaker 1: yields to go up more, particularly at the long end.
Speaker 1: But we've also seen some chatter about other assets being
Speaker 1: sold to satisfy these margin requirements. What have you seen there?
Speaker 1: I've seen talk of credit, you know, specifically some e
Speaker 1: t F given that they're more liquid than underlying cash bonds.
Speaker 1: But also I've seen people talk about the impact going
Speaker 1: as far as the Australian mortgage market. Last week, Yeah, yeah,
Speaker 1: I saw Australian rnbs that go on bid in project credit. Yeah, absolutely,
Speaker 1: that's far an offer. I'd say that the vast majority
Speaker 1: of large pension schemes which are in the UK market,
Speaker 1: large I mean l D I liability driven investment comes around.
Speaker 1: I mean covered at the last count, which will be
Speaker 1: smaller now about one and a half trillion pounds, but
Speaker 1: that would be like out of close to two trillion
Speaker 1: pounds worth of defined benefit pensions. So these are the
Speaker 1: kind of magnitudes and now the vast majority of them
Speaker 1: will have come through this and feel, wow, our strategy survived.
Speaker 1: You know, we didn't get into forced the leveraging. This
Speaker 1: is fantastic, and they'll feel really great about that, and
Speaker 1: I think that's good. But then they'll look at their
Speaker 1: asset allocation and they just go whose asset allocation is this?
Speaker 1: You know, this doesn't look like my asset allocation because
Speaker 1: it was all pulled so out of kilter by the
Speaker 1: changes that have occurred, not in the market values of
Speaker 1: the of the additional things, but rather you know that
Speaker 1: the bond portion is shifted around, the portion allocated to
Speaker 1: liquids will be much higher than they'd probably had in
Speaker 1: their policy, and so there will be this process of
Speaker 1: how do you get back to where you thought you were?
Speaker 1: And that's going to be kind of the next the
Speaker 1: order of business for the next few months. And can
Speaker 1: we beg We mentioned you had your your head of
Speaker 1: asset allocation at Columbia Threadne Can you just talk a
Speaker 1: little bit more for the You know, Tracy and I
Speaker 1: have known you for years. We've had you on the
Speaker 1: podcast Smart Guy on Details, Smart Guy on big philosophical
Speaker 1: questions about the definition of money. But maybe for people
Speaker 1: who are listening to you for the first time, can
Speaker 1: you describe what you did? But also like, what is
Speaker 1: the sort of normal state of the guilt market, who
Speaker 1: is trading them, who owned them? And like what is
Speaker 1: sort of like the the ecosystem of guilt holders and traders.
Speaker 1: What does that look like in normal time from your perspective. So, yeah,
Speaker 1: I used to be global head of as apllocation at
Speaker 1: Colombia thread Needle, which is a large investment firm. My
Speaker 1: team managed what about a hundred and sixty billion dollars
Speaker 1: across teams in four time zones the UK. Frankly, it
Speaker 1: is a fairly small part of that global that global area,
Speaker 1: but I had quite a lot of contact because a
Speaker 1: fund I managed, I mean, it served as a growth
Speaker 1: fund for pension funds that we're looking at liability driven investment,
Speaker 1: that sort of thing. So so I had conversations with
Speaker 1: pension fund trustees and and and consultants over the past
Speaker 1: sort of ten fifteen years to understand the kind of
Speaker 1: aims and ambitions that they have and how they're trying
Speaker 1: to implement these things. And in terms of the guilt
Speaker 1: market more generally, the guilt market is I mean, the
Speaker 1: UK defined benefit pension system is just very large compared
Speaker 1: to the amount of fixed income out there. I read
Speaker 1: I read a piece a few years ago which I
Speaker 1: haven't revisited, which was looking at the amount of duration
Speaker 1: in Sterling denominated instruments and comparing it to the duration
Speaker 1: of defined benefit pension schemes, Like if they all wanted
Speaker 1: to just allocate to bonds, could they know? Is the
Speaker 1: answer there? Simply isn't enough UK to or at least
Speaker 1: there wasn't enough UK duration for them to do that.
Speaker 1: They would have to take basis risk, They would have
Speaker 1: to go out and think of other strategies used derivatives
Speaker 1: in order to try to get towards that kind of
Speaker 1: locked funding ratio. I know we've been focused on pension
Speaker 1: funds for the most part, but in terms of those
Speaker 1: overlay strategies used to pump up leverage and therefore pump
Speaker 1: up returns. I mean, this was one of the suspicions
Speaker 1: about some of the big bond funds for the past
Speaker 1: ten years or so. Um, I'm thinking of one in
Speaker 1: particular selling a lot of volatility, you know, taking on
Speaker 1: a lot of duration risk and things like that. How
Speaker 1: endemic are these overlay strategies to asset management in general?
Speaker 1: I don't think that they are particularly endemic, I mean
Speaker 1: beyond the largest portion of the UK st management industry,
Speaker 1: which which is a livelit d of an investment side.
Speaker 1: But I think it's really really important because I realized
Speaker 1: you said at the beginning, you can get really that's okay,
Speaker 1: and I have done because you know, I'm part of
Speaker 1: your your audience. I listened to your podcasts. I love it.
Speaker 1: And I think lots of super geeky people do no
Speaker 1: offense to the rest of the audience. Geeks unite. But
Speaker 1: one of the things which I which I'm seeing in
Speaker 1: the mainstream well all across the main seam press in
Speaker 1: in the UK, is that leverage has been used to
Speaker 1: deuce returns to pump up returns. It's and that's not
Speaker 1: really what's going on here. What's really going on here
Speaker 1: is that there isn't enough UK fixed in come duration
Speaker 1: and it doesn't seem necessarily unreasonable to think about a
Speaker 1: recovery strategy for UK pension scheme which uses which uses
Speaker 1: synthetic duration to help you get there what's been I
Speaker 1: think the lesson that will be taken away from here
Speaker 1: is that you need to have way larger cushions in place,
Speaker 1: sort of basis points to exhaustion, if you like, on
Speaker 1: your derivative platform in order to know with confidence you're
Speaker 1: going to be able to implement it properly or you're
Speaker 1: going to have to have a much more liquid portfolio,
Speaker 1: which flies in the face of everything the government's been
Speaker 1: trying to do over the past few years to try
Speaker 1: and incentivize pension schemes to invest in infrastructure or property
Speaker 1: or venture capital or all the sort of things that
Speaker 1: might help the country's growth profile. That's kind of like
Speaker 1: going to reverse now, I'm going to up the geek sticks.
Speaker 1: Now it talk to us why there isn't enough supply
Speaker 1: of duration, because this is something that you hear in
Speaker 1: the US as well, although you know a lot of
Speaker 1: the commentary there is about the Central Bank having suck
Speaker 1: duration out of the market by purchasing MBS and other bonds.
Speaker 1: So yeah, I mean I've had this conversation about like,
Speaker 1: why isn't a more duration in the UK market for
Speaker 1: with various of degrees of success me trying to find
Speaker 1: the answer for the past twenty five years. I've spoken
Speaker 1: to you know, past heads of management office, the UK governments,
Speaker 1: different corporate treasurers, and where I've sort of got to
Speaker 1: on this is that actually, yeah, I would agree with
Speaker 1: the UK government that the UK government issues way longer
Speaker 1: than any other government. So the term structure of of
Speaker 1: guilts is just hugely longer than any other G seven
Speaker 1: government in orld, or in fact, I think any government
Speaker 1: in the world, and that's partly trying to satisfy that
Speaker 1: first duration at the same time and his balance a
Speaker 1: question which I didn't answer sorry earlier, Tracy, when you said, well,
Speaker 1: who else is in the market the guilts? Right, So
Speaker 1: the shorter part it's insurance funds, and longer part is
Speaker 1: all pension funds. The middle part is fairly sort of
Speaker 1: makant really, So yeah, the UK govern already excuse their
Speaker 1: in terms of corporate bonds, now, the corporate bond market
Speaker 1: in the UK is just really tiny there isn't a
Speaker 1: huge amount of bond borrowing by UK companies, and I
Speaker 1: was kind of thinking, well, why, I mean, there's sort
Speaker 1: of doing this through having an unfunded pension scheme. And
Speaker 1: then it sort of struck me, well, maybe maybe they've
Speaker 1: decided to do their long dadd corporate boring through an
Speaker 1: unfunded pension scheme because the fees that go to the
Speaker 1: Pension Protection Fund, which is our version of the PBGC,
Speaker 1: might might actually be kind of lower than the aggregated
Speaker 1: you know, the spread that you might pay. This is
Speaker 1: what I mean by Toby being both technical and philosophical
Speaker 1: at the same time. I like that, you know, it
Speaker 1: sounds like if there's a shortage of duration, then the
Speaker 1: government should enact a budget that increases guilt issuance by
Speaker 1: Weren't they just trying to solve a basic problem there?
Speaker 1: But in all seriousness on that point, I mean, it's
Speaker 1: kind of a troll but also not really like what
Speaker 1: is it? What was it about that announcement? You think
Speaker 1: that was so like, this is what I'm still trying
Speaker 1: to wrap my head around, right, and why I was
Speaker 1: I trying to um, you know, what I was asking about?
Speaker 1: What were liquidity conditions in the days run up to it.
Speaker 1: What was it about the announcement? Such violence in the market. So,
Speaker 1: I mean I was watching the announcement with with a
Speaker 1: bunch of fellow geeks, you know WhatsApp group, and we
Speaker 1: were looking at and going oh my god, oh wow,
Speaker 1: as he was announcing these things. But if you'd asked
Speaker 1: me before, you know, if I had been that guy
Speaker 1: who's put into number eleven saying so here's what we're
Speaker 1: gonna do, I go, wow, that's that's really that's a
Speaker 1: bit of a shocker. If I was asked like, what
Speaker 1: do you think the market is going to do? I
Speaker 1: wouldn't have said what it did, right, you know. And
Speaker 1: so I mean I think that you can explain what
Speaker 1: happened by by two things. And this is kind of like,
Speaker 1: you know, it was partly the substance. I think that's
Speaker 1: definitely part of it, but it was also the style.
Speaker 1: So you know, I mean that the new Prime Minister,
Speaker 1: Liz Traus and her chancey Chancellor Quasi Quatain came to
Speaker 1: power and Queen immediately died, and so nothing happened at all,
Speaker 1: but they wanted to do stuff before Parliament sort of
Speaker 1: went into recess. Now they're pretty iconoclastic in their style.
Speaker 1: During the whole leadership campaign, the Prime Minister put the
Speaker 1: Bank of England mandate into play. On the first day
Speaker 1: in the role, Quasi Quantain sacked Tom Scholar, who was
Speaker 1: the most senior respected official in the Treasury. From their perspectively,
Speaker 1: be proud of the establishment. He Quasi Kana announces that
Speaker 1: it will be a physical event and it wouldn't be
Speaker 1: a budget because you know, the o B are the
Speaker 1: Officer of Budget Responsibility are version of the CBO. It
Speaker 1: has to look at budgets, it has to kind of
Speaker 1: put forecasts out and it's like, you know, he didn't
Speaker 1: want his homework marked by them, right, So all of these,
Speaker 1: all of these sort of stylistic things come through and
Speaker 1: then you make a sort of a big, sort of
Speaker 1: shocking announcement which is way bigger than anyone was expecting.
Speaker 1: And the gild market seemed to have have a bit
Speaker 1: of a bit of a meltdown straight away, as the
Speaker 1: Bank of England was already you know, hiking rates and
Speaker 1: as you said at the start of the episode, rates
Speaker 1: around the world are already rising. And then over the weekend,
Speaker 1: you know, so Friday that was the biggest move and
Speaker 1: yield in thirty five years, a huge move. So and
Speaker 1: then so over the weekend KWASI Kartin's interviewed and he
Speaker 1: doubles down. He's like, oh, we've got new unfunded tax
Speaker 1: cards to add to this, and he's you know, he's
Speaker 1: jocular about it. So so Monday you have a bigger
Speaker 1: move and you had on Friday, you know, the even
Speaker 1: bigger move in thirty five years. That the style is
Speaker 1: really important, you know, if there's this kind of feel
Speaker 1: to markets, which which I think I don't. I don't
Speaker 1: think it's like putting a slide rule and saying, you know,
Speaker 1: you do this measure, you get this number of basis
Speaker 1: points rise. It's it's it's the style is important as well.
Speaker 1: And that's why I think that's today in coming out
Speaker 1: and doing a major U turn after everyone's saying they
Speaker 1: were going to do. I mean, the Priminister was on
Speaker 1: I was on National TV yesday saying we're absolutely not
Speaker 1: going to U turn. This is absolutely you know what
Speaker 1: we're going to do. And then there are mid the
Speaker 1: middle of the annual party conference right now to come
Speaker 1: out and you turn. I mean that's a that's a
Speaker 1: big kind of like, okay, the styles over, you know,
Speaker 1: we're changing now, this was going to be my next question. Actually, um,
Speaker 1: you know, if it's more about the style and you know,
Speaker 1: it really seems like there is a lack of a
Speaker 1: cohesive plan at this point, you can argue that maybe
Speaker 1: you know, some aspects of it makes sense, and I
Speaker 1: know Joe has been doing his share of this on Twitter. Didn't.
Speaker 1: But like after the U turn, we have seen bond
Speaker 1: yields start to come down, we've seen sterlings start to recover.
Speaker 1: Should that be the right interpretation of the market that
Speaker 1: like the problem is solved now it's it seems if
Speaker 1: it's a problem of style and the UK government not
Speaker 1: really being sure what it's doing here, then that kind
Speaker 1: of U turn doesn't necessarily bode well. I think the
Speaker 1: big important U turn is on style. But there was
Speaker 1: also a substance return for for your listeners who were
Speaker 1: not in the UK realm. There was this idea of
Speaker 1: of scrapping the top rate of income tax, which is
Speaker 1: fort on over a hundred and fifty thousand pounds, so
Speaker 1: you only you know, the top rate would be somewhat
Speaker 1: lower than that that was only going to cost two
Speaker 1: billion pounds a year. I say only two billion pounds
Speaker 1: a year, but there we go. It's it was a
Speaker 1: small part of that forty five billion package. But today
Speaker 1: they also said, right, well, we're going to freeze various
Speaker 1: other budgets and and that will deliver eighteen billion pounds
Speaker 1: of savings. So put those two together. That's actually there's
Speaker 1: some substance there as well. You know that the market
Speaker 1: was looking for around about thirty billion unfunded tax cuts
Speaker 1: and that would be using up all the fiscal room
Speaker 1: from the previous O b R financial projection, and so
Speaker 1: it was it was a thirty five up to forty five.
Speaker 1: That was an element of surprise. And so the substance
Speaker 1: has been in, you know, fully unwound in a way
Speaker 1: which I think a lot of people here will be
Speaker 1: horrified to find the public services which are falling apart,
Speaker 1: are going to be impacted as as a way to
Speaker 1: to kind of pay for some of the other unfinded
Speaker 1: tax cuts. And then that sort of chef's kiss of
Speaker 1: tax cuts for the very richest has been removed. And
Speaker 1: that's very stylistic. You know, I'm looking at all these
Speaker 1: charts on my screen. And again, if you just sort
Speaker 1: of put a hand over on the screen over last week,
Speaker 1: you have a bunch of lines almost where they were
Speaker 1: before the tax cuts at this point. And I think
Speaker 1: it was you though, and you've written like in the
Speaker 1: last week, I think like five or six blog posts
Speaker 1: and been a must follow on Twitter as always, But
Speaker 1: I think it was you that saying something like you can't.
Speaker 1: Did you say that you can't unburned toast? Was that
Speaker 1: your line? Yeah? So so what does it mean starting
Speaker 1: now here like October three, when people are thinking about
Speaker 1: you know, we talked about, oh, well this move should
Speaker 1: only happen once every hundred trillion years or something. No
Speaker 1: one said that, but like now we've seen the move.
Speaker 1: We now we seen that it's possible now that we
Speaker 1: can we can't unburn that we can't un see it
Speaker 1: even if I put my hand over the middle of
Speaker 1: the screen. So what does it do for managers? And
Speaker 1: they're thinking about risks that such a move are now
Speaker 1: proven to be possible, right, right, So there's this huge
Speaker 1: kind of efficiency versus resilience sort of battle, right, And
Speaker 1: one of the things that the UK government was keen
Speaker 1: to do is to reform solvency to which is a
Speaker 1: bunch of insurance regulations, so that they would need to
Speaker 1: have less capital dead capital sitting at the sidelines just
Speaker 1: in case. You know, it's part of resilience and you
Speaker 1: know what what they might well go through that and
Speaker 1: maybe that's even so sensible. But from a risk manager's perspective,
Speaker 1: that's using I mean, all risk models pretty much are
Speaker 1: fed with with historical data sub description, and this is
Speaker 1: now in the history. So every stress test that the
Speaker 1: asset managers or investment banks used, which are kind of different,
Speaker 1: like scenario stress tests, you'll have one which will be
Speaker 1: you know, UK has a bit of a meltdowns as
Speaker 1: one of those sort of stress tests, and you'll need
Speaker 1: to make your portfolio survive that stress test. From now on,
Speaker 1: if you have portfolio risk that you're looking at within
Speaker 1: your portfolio risk system, your portfolio might look a little
Speaker 1: bit riscue than it did because simply that historical data
Speaker 1: is feeding it. And so if you've got a risk
Speaker 1: budget that you're working to, you might need to take
Speaker 1: a little bit less portfolio risk. I mean, that's it's
Speaker 1: it just kind of goes into the into the plumbing
Speaker 1: of risk systems on bank trading desks and portfolio managers,
Speaker 1: and it'll fall out eventually, you know. I mean, these
Speaker 1: things tend to be like exponentially weighted, um, so after
Speaker 1: a few years even it'll it'll kind of be a
Speaker 1: very modest thing, be more on a discrete scenario side.
Speaker 1: But this now exists on everyone sort of blotter, and
Speaker 1: it's going to inform decisions, whether people think about that
Speaker 1: consciously or whether it's just you know, underneath. So this
Speaker 1: to me is the sort of big picture change that's
Speaker 1: happened over the past couple of weeks, which is this
Speaker 1: idea that we're all coming to grips with severe interest
Speaker 1: rate volatility, and we can see government bond yields that
Speaker 1: are usually assumed to be relatively stable move very quickly
Speaker 1: and very suddenly. And we've designed an entire financial system
Speaker 1: around the assumption that that doesn't happen very much. So
Speaker 1: we have a lot of bank capital rules like quidity
Speaker 1: coverage rules, pension fund rules that tend to herd investors
Speaker 1: into these stable and ostensibly safe government bonds, and so
Speaker 1: when that doesn't happen, when they turn out to be
Speaker 1: really volatile, it becomes extremely painful and in some circumstances problematic.
Speaker 1: Is that, like, is that something you would agree with
Speaker 1: or how would we resolve that tension? The idea that
Speaker 1: you know, most big investors are supposed to hold a
Speaker 1: whole bunch of government bonds, but then you know, we
Speaker 1: get a week like like last week, and suddenly those
Speaker 1: remant bonds turn into a liability. I should be careful
Speaker 1: about using liability when we're talking about pension funds. But
Speaker 1: you know what I mean, yeah, yeah, yeah, I mean
Speaker 1: I think I think you some are brilliantly fantastic communicator.
Speaker 1: I would just carvat a little bit, just in spirit
Speaker 1: of geekiness, in that you know, four full pension funds,
Speaker 1: the long end is the risk free asset simply because
Speaker 1: that's where the liability sit. But you know, so on
Speaker 1: on an unleveled basis, you're having a load more. If
Speaker 1: there was enough duration, would would be a would be
Speaker 1: a great, great thing for them. I mean, they would
Speaker 1: be able to close the fund ration and that's it.
Speaker 1: But because that market structure doesn't really facilitate that to happen,
Speaker 1: then yeah, that's going to be a problem. You know,
Speaker 1: just going back to earlier Tracy as like, well, how
Speaker 1: should we sort of conceptualized or categorize the BOS intervention
Speaker 1: shouldn't be considered quie or not? Or is it just
Speaker 1: some other kind of market operation. If guilt government bonds
Speaker 1: are the like by definition are the definitional risk free asset,
Speaker 1: then the central bank in any country can't just let
Speaker 1: them deviate too far. I mean that people talk about
Speaker 1: a bailout, but essentially like it sounds like they they
Speaker 1: just have to step in. Yeah, I completely agree with that.
Speaker 1: You you have to have a government curve, you know,
Speaker 1: without that and nothing else works. Right. Also, I mean
Speaker 1: the sort of striking thing is there's a lot of
Speaker 1: talk about central banks losing control of the long end
Speaker 1: of bond markets, but then, as you pointed out, when
Speaker 1: the BOE announced its intervention, it actually seems to have
Speaker 1: had more impact than it might have expected. Yeah. No, absolutely.
Speaker 1: I mean if people talk about losing control of along
Speaker 1: and it's not something that that the Bank of England
Speaker 1: would typically want to have any control of at all.
Speaker 1: They'd want market expectations to shape that. But getting into
Speaker 1: a doom loop is going to be something which will
Speaker 1: cause systemic problems potentially, and so as a as as
Speaker 1: the lender of last resort or market maker last resort,
Speaker 1: you need to step So, Toby, we're going to have
Speaker 1: to wind up our conversation now. But I guess just
Speaker 1: going back to the big picture of what's going on
Speaker 1: with the UK government and UK market, what are you
Speaker 1: on the lookout for for next steps or developments that
Speaker 1: might inform the future path. So I'm kind of on
Speaker 1: the pension fund side, I'm sort of thinking that a
Speaker 1: bunch of pension funds will unfortunately have lost their hedges
Speaker 1: and so you know, will they be coming back into
Speaker 1: the market to actually buylong dated bonds in order to
Speaker 1: know which could cause a real rally from here at
Speaker 1: the long end. Some people I speak to in the
Speaker 1: market on the investment consulting side and hedge funds side,
Speaker 1: they're they're sort of thinking, right, is there going to
Speaker 1: be some kind of stop loss safari that goes on?
Speaker 1: Because that's a great term, because you know, what was
Speaker 1: revealed during this whole debacle was that actually, if you
Speaker 1: push up long dated you US boy a hundred basis points,
Speaker 1: you can throw some of these structures into unwind. And
Speaker 1: so I think schemes are trying to manically make sure
Speaker 1: they're in a situation whereby once the Bank of England
Speaker 1: intervention ends, that that's not going to be possible anymore.
Speaker 1: So that's that's going to be very interesting to watch,
Speaker 1: al right. I love the idea of going on a
Speaker 1: stop loss Safario. It's not as fun as it sounds,
Speaker 1: all right, Toby Nangle, thank you so much for coming on.
Speaker 1: Odd lots, fantastic to talk with you as always. Thanks
Speaker 1: for having me. Great to speak to you again. Thank you.
Speaker 1: So it's been too long to well, we'll have you on.
Speaker 1: We'll have you on again, tune to talk about how
Speaker 1: to stop lost so far as go. But that was great, Joe.
Speaker 1: I thought that was a fantastic conversation and it did actually,
Speaker 1: I guess, help in my mind crystallize some of the
Speaker 1: there's been so many big ideas floating around based off
Speaker 1: of the price action that we've seen over the past week. Yeah,
Speaker 1: I just think it was very helpful just to get
Speaker 1: that distinction between liquidity verse solvency and the context of pensions,
Speaker 1: because it's easy to sort of like have this cruse.
Speaker 1: It's like, oh, the pensions, they have a lot of guilts.
Speaker 1: The value of the guilts plunged another insolvent. Actually they're
Speaker 1: not unsolvent in large part because by the conventions of accounting,
Speaker 1: their obligations went down to But this theme and the
Speaker 1: fact that we talked about it earlier in the year,
Speaker 1: like five months ago, with the commodity markets, we see
Speaker 1: how really fast moves in leveraged areas can create liquidity crises,
Speaker 1: even when the fundamentals aren't so bad. Right, And this
Speaker 1: kind of gets to the central bank point that Toby
Speaker 1: was making as well, which is as as fun as
Speaker 1: it is or as bizarre as it is to watch
Speaker 1: a central bank that is ostensibly reducing its balance sheet
Speaker 1: and embarking on quantitative tightening actually go back into the
Speaker 1: market and start buying bonds. That's the role, right, Like
Speaker 1: that is the classic lender of last resort. You see
Speaker 1: a liquidity issue like this, not a solvency issue, a
Speaker 1: liquidity issue, they're supposed to step in. This is really
Speaker 1: key and I tend to think that this is where,
Speaker 1: you know, I get a little frustrated with some of
Speaker 1: the commentary because central bank is part of the modern
Speaker 1: financial infrastructure, and so I think people like to pretend
Speaker 1: that like, oh, like real capitalism or real markets is
Speaker 1: when the central bank is hands off and then you know,
Speaker 1: let the chips fall where they may. But I think, like,
Speaker 1: you know, part of this, the central bank does exist.
Speaker 1: It's coret of the system, and part of its role
Speaker 1: is to stabilize, especially the government bond market for very
Speaker 1: good reason. I don't think that per se means it's
Speaker 1: like cheating or a bailout or I'm not I'm not
Speaker 1: convinced that these are like useful terms when describing the
Speaker 1: central bank playing its role. Now, I think that's right.
Speaker 1: What I would say is it does seem like a
Speaker 1: very calmmplicated place for the BOE to be in. And
Speaker 1: you know, the idea that tomorrow we could wake up
Speaker 1: and the Conservative government has made some new announcement or
Speaker 1: a new U turn, who knows, and the b o
Speaker 1: E is going to have to try to formulate the
Speaker 1: correct response to that. Like that does seem tricky. I
Speaker 1: completely agree, And I would say there's two things. One
Speaker 1: is every central bank right now is an inflation fighting mode,
Speaker 1: right none of them want to be using balance sheet policy,
Speaker 1: you know, they're all like QT of some sort. And
Speaker 1: so the idea that like this is gonna put qt
Speaker 1: on hold, or that they might even have to expand
Speaker 1: their balance sheet. I think is an uncomfortable position to
Speaker 1: put in. But what I would say, also to your
Speaker 1: point about responding to policies and something could change tomorrow.
Speaker 1: There could be a new tax cut or two high
Speaker 1: tax hiker. Who knows, We have no idea. But what
Speaker 1: I would say is, you know, I think going back
Speaker 1: to this, it's like, can they respond on the inflation
Speaker 1: side of the mandage? So if there's more spending or
Speaker 1: more tax cuts, okay, we're gonna have to hike rates
Speaker 1: to hit target high grates further while also with you know,
Speaker 1: with the left hand, while with the right hand making
Speaker 1: sure markets stay stable. It's a tricky situation. Well, this
Speaker 1: kind of goes back to the whole designing a financial
Speaker 1: system around government bonds thing as well, and I think
Speaker 1: it was Connorson had a great tweet about how you know,
Speaker 1: it's not just the financial system, it's monetary policy as well.
Speaker 1: Like monetary policy works through changing the price of government debt.
Speaker 1: So if you want to change employment or inflation, you're
Speaker 1: going to have to do something to the price of
Speaker 1: government debt, which makes everything a lot trickier at a
Speaker 1: time when you know people are really focused on interest
Speaker 1: rate volatility. Yeah, all right, we should leave it there,
Speaker 1: because we could talk about this for another two hours probably.
Speaker 1: All right. This has been another episode of the All
Speaker 1: Thoughts podcast. I'm Tracy Alloway. You can follow me on
Speaker 1: Twitter at Tracy Alloway and I'm Joey Isn't All. You
Speaker 1: can follow me on Twitter at the Stalwart. Be sure
Speaker 1: to follow our guest Toby Nangle He's at Toby Underscore.
Speaker 1: And follow our produce user of this episode, Dash Bedding,
Speaker 1: He's at Dashbot. And follow our other producer, Carmen Rodriguez
Speaker 1: at Carmen Armand. And if you're looking for even more
Speaker 1: discussion on the pound, guilt and everything else going on
Speaker 1: in the British economy, definitely check out In the City.
Speaker 1: It's a new podcast from Bloomberg UK and it's toasted
Speaker 1: by Francine Lachlaw and David Merritt. It's covered all these
Speaker 1: finance stories straight from the heart of London. Thanks for listening.