Thursday, Dec 10, 2009

Out of rope

Spectator: The markets' verdict on the PBR

Darling's fudge didn't go down very well. People have started selling off their 10 year gilts.

Posted by stillthinking @ 03:56 PM (2959 views)
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1. 51ck-6-51x said...

Sell UK Gilts, buy other sovereigns it'll be sell London property buy Geneva property.

Thursday, December 10, 2009 04:43PM Report Comment

2. crunchy said...

"The pound is holding together for the moment, but further gilt weakness or an increase in Bank of England monetisation at its meeting today would see it hit hard."

Loving it my Darling. xxxx

Thursday, December 10, 2009 05:41PM Report Comment

3. will said...

Tax and interest rate rises may lead to many leaving the UK.

Thursday, December 10, 2009 06:51PM Report Comment

4. jack c said...

Fears of a hung parliament appear to be growing as next year’s general election draws closer and commentators, investors and voters begin to question whether the likelihood of the Conservatives taking a clear lead has been over-estimated.

A recent ComRes poll for The Independent newspaper at the beginning of December suggested that Britain could be on course for a hung parliament, as the Tories’ lead over Labour narrowed to 10 points over the past month.

The most likely consequence of a hung parliament, investors argue, would be indecision surrounding the question of how to reduce Britain’s ballooning debt, which stood at £829.7 billion, or 59.2% of GDP in October.

At the most pessimistic end of the spectrum, a recent note by Morgan Stanley said: ‘Growing fears of a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK’s AAA status.’

In this situation, a fiscal crisis could lead to the flight of domestic capital, a severe weakness in sterling and a gilts sell-off. That could cause the Bank of England to raise rates to boost confidence in monetary policy and sterling, threatening the fragile economic recovery and causing yields to rise by 150 basis points, the note concluded.

John Pattullo, head of fixed income at Henderson Global Investors, believes a hung parliament is a real possibility and is shorting gilts as a result. He argues that the prospect of a hung parliament, coupled with the effects of quantitative easing, could create a gilt bubble and lead to a sterling crisis.

He said: ‘The Tories do not have a big enough majority at present and need a strong majority to get the mandate to retrench on public spending.’

He added: ‘The Tories also need a decent election turn-out, bearing in mind that the turn-out in Scotland was the lowest it has ever been. In terms of the implications of a hung parliament, I don’t think the government will have the mandate to reduce public spending and reduce the deficit to satisfy the gilt market and keep the deficit contained.’

He believes a potential 150 basis point rise in gilt yields is ‘not inconceivable’.

Kevin Doran, head of fixed interest at Brown Shipley, is also shorting gilts as he is bearish on the state of the UK’s finances.

He is not ruling out a hung parliament next year but believes that a Tory majority is a more likely scenario.

He anticipates that gilt yields will rise by 150 basis points regardless of what happens in the election due to the sheer weight of supply on the market, pointing to the net issuance of £220 billion this year and another £175 billion expected next year.

Although bank ownership of gilts has risen to £125 billion from almost zero in the past year in an attempt to improve the liquidity of balance sheets, Doran is concerned about the recent reduction in ownership of gilts by foreign investors.

Graeme Caughey, head of government bonds and cash at Scottish Widows Investment Partnership, estimates that yields could go up 100 basis points or even higher in the event of a hung parliament.

If neither party can push anything through parliament and there is no fiscal tightening, it will be left to the Monetary Policy Committee to keep inflation under control, he said. This could mean that interest rates will be raised higher than people expect, pushing yields still higher.

Chris Huelin, head of fixed interest at Collins Stewart Wealth Management, said: ‘What needs to change to get to a hung parliament from here? It would surely mean that voters can see an improvement in the economic situation for voters, both personally and nationally, in order for the Labour party to improve in the polls.

‘A hung parliament could mean potential positives and negatives for the gilt market.

‘The positive is that the outlook for debt issuance is better because the economic outlook has improved and measures Labour has taken start to work in a more constructive manner.’

An improved ‘income to expenditure’ ratio would also alter the need for so much gilt issuance, allowing yields to normalise without the artificial support of quantitative easing, Huelin said.

In reality, he anticipates the government will find it difficult to end the higher level of issuance too early. With gilts yields at their current low levels, he concludes ‘it is hard to see a bias of lower yields in the current situation’.

Source - Citywire 10/12/2009

Thursday, December 10, 2009 06:56PM Report Comment

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