England’s Failed Auction: Ominous Sign for the US?
Mar 26, 2009
Posted by Jody Eisenman | Filed under Uncategorized, auto bailout
The UK tried to auction off $2.6 billion in 40 year bonds yesterday, but failed to get the requisite number of bids. This was the first failure of non-indexed bonds there since 1995. The government of Prime Minister Gordon Brown is in danger as the English economy continues to contract.
Why am I bringing this up? Because in an effort to stimulate their economy, the Bank of England cut their benchmark lending rate to half a percent. When that didn’t have the desired effect, they decided to buy up long term government bonds. Investors reacted by staying away from the auction. Here in this country, the Fed lowered its’ targeted Fed Funds Rate to essentially zero. When this did not have the desired effect, the Fed announced they would be purchasing long term bond, much like the Brits. As I described earlier this week. If investors refuse to buy long term treasuries, the Fed will almost certainly be forced to raise interest rates at a time they are desperately trying to keep them as low as possible. Should investors continue to stay away, there is a real default risk. UK Credit Default Swaps currently trade at around 111 basis points, substantially higher then other industrial nations such as the US, Japan and Germany. I continue to believe that the Feds’ actions comprise a high risk bet on stimulating the economy.
