No Gilt-y Pleasures As Investors Remain Wary Of Darling’s Optimism
After the government announced it would issue £220bn-worth of gilts yesterday to help prop up public spending during the recession, it’s looking uncertain whether there’s going to be any takers for the damn things. One strategist told Bloomberg that “The scope for bouts of indigestion going forward is high”, and he’s not just talking about the venison he had for lunch at Quo Vadis – the danger is that with growing scepticism about the benefits to be gained from investing in these gilts, despite the fact they’re backed by Queen Liz, investors will go elsewhere for their medium-term investments. And then the Army won’t get their shiny new barracks that Darling promised them.
As Gillian Tett notes in a sarky, dare I say bloggy tone, “Chocolate coins are now deemed safer than gilts” – she points out that it costs less to insure an investment in Cadbury’s than it does in the UK government. The worry is that if gilts are seen as being risky, demand for them will go down, which makes the “yield” (basically the risk and costs involved in investing in them) rise and the price of them fall. For now, gold and shares are still unattractive prospects too, so the gilts market isn’t too bad, but it’s going to be a nervy few months for the government as they see whether anyone wants to buy what they’re selling, at a price that’s worthwhile.
Today, prices are falling and yields are rising, just what the government doesn’t want. Robert Stheeman, head of the debt office that’s issuing the gilts and whose parents may or may not have spelled his name wrong on his birth certificate, said: “It’s a challenging remit but I am confident that there is strong ongoing demand for gilts and we will work closely with the market to successfully deliver it.” The weakness of the pound may scupper your chances of a continental holiday this year, but at least it’ll help make gilts a more attractive investment. Every cloud, eh? Though if the pound continues to tank then returns on the investment won’t be as good, so they’re a potentially poisoned chalice.
It’s enough to make us average Joes go and exploit the bigger ISA allowance, despite the crappy returns they dole out. And as we noted yesterday, we need to rise above party political sniping to create a unilateral vote of confidence in the British economy over the next few years – if investors believe that, then we’ll get more money from selling off these gilts, as we’ll get higher prices for them. But let’s face it, this is open season for Cameron. On such times are general elections won and lost, no matter what the effects on the economy.
Posted by Ben Beaumont-Thomas in Hot Money | April 23, 2009 2:56PM |