Toby Nangle on What We Just Learned From Gilt Market Madness

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, we need to talk about the UK.

Joe Weisenthal (0:18)

Yeah, we definitely do. The last couple weeks, of course, have been consumed by the volatility in the pound and the guilt market.

And I think it's actually good that we waited a few days. Maybe it would have been fun to do one right away, but there's so much confusion that I actually think for learning something, it kind of helps to have waited a few days. That's my excuse.

Tracy Alloway (0:37)

Well, I'm gonna start this conversation with a massive caveat, which is we are recording this on October 3rd. Things can change in the couple of days that it takes us to get this out. And already things have changed quite a bit. So, the week before we recorded this, we saw massive movements in the UK market. So we saw a five-year gilts at like 4.7%, which was the highest since 2008 We saw an even bigger move in longer dated gilts. I think the 20-year was at almost 5%. It's now back below 4%.

The pound reached a record low against the dollar. All of this was after the UK unveiled a mini budget that featured a bunch of tax cuts that were expected to balloon the public deficit at a time of inflationary pressure in the UK, Joe. I'm just gonna make that point.

But even then, in the one week since all of that happened, we now have the UK Prime Minister, Liz Truss, coming out and basically doing a U-turn on one big component of the mini budget, which was the tax cuts. And so we're seeing some relief in the market, but there's still this big question over what exactly just happened.

Joe Weisenthal (1:45)

Right, and so it really, I mean, the story kind of started on September 23rd when those tax cuts were announced. It really started accelerating in the middle of the following week. The Bank of England was forced to essentially enter the market. And when you have these big moves in government bonds, there's always this debate, and you've written about it for years. In other contexts, it's like how much is, quote, fundamental and how much is technical? How much does it have to do with market structure versus some sort of like meaningful signal about the path of expected inflation or the Bank of England's policy rates?

And at times, there is a deviation. And it seemed at least at one point last week that there was a pretty big deviation between something like fundamental versus the sort of like technical driven market that may have been causing a run of sorts in at least one corner of the market.

Tracy Alloway (2:35)

Right, so we are going to be getting into this technicals versus fundamentals question with really the perfect guest.

We're gonna be speaking to Toby Nangle. He is an economic and markets commentator who worked in asset management for 25 years, formerly the head of global asset allocation for Columbia Threadneedle, also a previous Odd Lots guest and someone who is quite philosophical at times over money and what markets are telling us.

Joe Weisenthal (3:02)

Well, they can get technical too. Combine the philosophy with the technical.

Tracy Alloway (3:06)

Which is a rare combination. So I'm looking forward to this conversation. Toby, thank you so much for coming on Odd Lots.

Toby Nangle (3:12)

Thanks for having me.

Tracy Alloway (3:14)

So maybe a basic question to start off with, but how remarkable were the events of the previous week or so in your mind?

Toby Nangle (3:22)

Oh my goodness, yeah.

I mean, for the gilt market, there's nothing like that in my career. And I was looking back using Bank of England data and you can't really find something like it for the part, well, since 1978 on the daily data that they have there, to have the short-gilt market completely reprice the Bank of England rate path and the way it did. And then also the long end kind of go from this big bear flattening into this huge bear steepening as you had liquidation trades and a run dynamic unfold with the Bank of England then having to intervene to start buying bonds when it's trying to do QT. I mean, there's nothing like it. It's really an extraordinary episode.

Joe Weisenthal (3:59)

We need to talk to Richard Silla, who, you know, history of interest rates going back to like 2000 years ago.

Tracy Alloway (4:06)

That was one of our first episodes.

Joe Weisenthal (4:08)