Newspaper article The Journal (Newcastle, England)

Long-Term Gilts May Lose Their Lustre

Newspaper article The Journal (Newcastle, England)

Long-Term Gilts May Lose Their Lustre

Article excerpt

Byline: ANDREW MILLER

ALISTAIR DARLING did something impressive last Wednesday: He managed to shock the bond market, even though it was well prepared for bad news.

The issues most troubling for gilts investors are: .. Gilt issuance is forecast to be pounds 220bn, significantly above the pounds 180bn-pounds 200bn figure mooted in the Press.

. This is driven by the public sector deficit hitting 12% of GDP; furthermore, total Government debt will amount to 80% of GDP by 2014 and only start falling by 2017.

. These forecasts are based on the assumption of a rapid rebound in growth in 2010; therefore, there is further downside risk.

The Government is struggling not only because the economy is contracting, but also because its tax receipts are shrinking faster than the economy, while expenditure remains stable or is rising (due to things like unemployment benefits). There is some chance that receipts may grow more rapidly than currently estimated, especially if inflation rises, but it currently appears that the bond market will be called on to absorb a lot more issuance than in previous years.

Investors have clearly taken fright, and while the Bank of England's programme to buy gilts offers some support in the short term, it is only a temporary fix: when the Bank decides to exit this programme it, too, will become another major source of gilts for quite some time.

Unsurprisingly, gilts generally sold off following the Budget and there was also increased concern that the UK could lose its long-held AAA credit rating. Moody's, the credit rating agency, understandably said that a persistent deficit above 5% could be a reason for reviewing the UK Government's rating over time, but a change in the short to medium term seems unlikely, especially as Standard & Poor's recently reaffirmed its AAA rating. …

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