The Gilt Market

Next week’s Budget provides the Chancellor with an opportunity to address the distortions at the long end of the gilt yield curve with the announcement of the gilt funding remit for the next financial year. But although there is a possibility that long gilt yields will rise in response, there are three reasons why any fallout is likely to be modest.

First, it is expected that the Chancellor will issue £70bn of new gilts. Although this would be an historical high for any one year, it is not much compared tothe various estimates suggesting that outstanding demand for gilts from pension funds and insurance companies is between £600bn and £650bn. Even if strong foreign buying has played a significant role in pushing yields lower, another £70bn might not be enough to satisfy any outstanding overseas demand.

Second, the latest hints from the Chancellor and consultations involving the Debt Management Office suggest that not all of the £70bn is likely to be issued in the form of long gilts, for fear of compromising liquidity at the short-end of the curve.

Third, any market response to the action that the Chancellor may take might have already been built into the market. Indeed, 20 year yields have risen in recent weeks by 36bps to 4.18%, while the yield on an index-linked gilt of the same maturity has increased by 29bps to 1.23%.

However, the markets may not have given due consideration to the possibility that the Chancellor might take more drastic action. It is not completely impossible that all new issues will be in long conventional or index-linked gilts. Although this may compromise liquidity at the short-end of the curve, there is an argument that this would be a small price to pay for the benefits of solving the obvious and larger problems of artificially depressed yields at the long end. It is even possible that the Chancellor adopts Willem Buiter’s suggestion of buying back short gilts and issuing longs, or “overfunds” by issuing more than the £70bn of gilts that the public finances require.
Bottom line: Overall, it is unlikely that the announcement of the new gilt financing remit next Wednesday will have much impact on the level of long gilt yields. But there is small chance that some more unconventional gilt funding measures will prompt long gilt yields to move sharply higher.

Is The Global Equity Bull Market Stretched?

The current run in global stocks appears stretched when compared to past bull markets. Nonetheless, we expect that global equities should continue to grind higher.

The bull market in global equities is entering its fourth year, which has some investors questioning how much more rally room exists. Indeed, the current rally has now exceeded the median duration and magnitude of past major up-cycles since 1970, suggesting that the risk/reward trade-off is deteriorating. Further contributing to investor worries are already high profit margins and increasingly broad-based monetary tightening. Despite these concerns, global equities are still attractive. The global earnings outlook remains positive, valuations are reasonable and liquidity conditions are still supportive.
Bottom line: the current bull market is not over.

And the FTSE-100 (5965.1)……

……closed at another multi-year yesterday (up again today), taking its gain for the year to 346.3 points, or 6.16%, and although there are still a couple of weeks to go (and much can happen in that period!) this is shaping up to be the best first quarter for the leading index since 1999. The good news is that, on the daily chart at least, it does not look particularly overbought and that’s one reason why it appears to have room for further upside over the near term With the US S&P500 starting to break out through the top of its trading range it would not be surprising if a move above 6000 happened sooner rather than later.

And finally………..

Following the Governments freedom of information act you can now get access to speed camera offences registered in the last 12 months.  

Did you know that every time your car goes past a speed camera even 1mph over the set limit it is registered and put on a database?

You only get a ticket if you are way over the limit or, (this is the bit that we didn't know) if you receive over 20 near misses, you will be classed as a serial offender and get a ticket the next time you go just over the limit. This is why you hear of people being done for 34mph in a 30 limit area whilst others doing 39 do not.  

You can check what has been registered against your vehicle at the  following address

  www.e-database.co.uk>   http://www.e-database.co.uk

You will be asked for a password but just click on the need a password link and you will be given one for future use. If there is any data on your vehicle you can click on the camera window to see a copy of the photograph. This photo will come in handy if you challenge any charges.

Prometheus from sources: ADM, Barclays Capital, Cazenove, Charles Stanley, HSBC, ING, SocGen, UBS.