FEAR OF FINANCE

The chronic tendency of governments to spend more than they can decently raise in taxes has led to the unthinkable. Ken Clarke is pressing ahead with reforms of the government debt markets and gilts have suddenly become a fashionable topic of conversation.

There was a time when a mere passing knowledge of the stockmarket was all that was needed to appear financially competent at social functions. ("I see British Telecom are up another 10p.'' "Yes, I must contact my broker....'') Now you must be able to talk gross redemption yields in the corporate hospitality boxes at Rolling Stones concerts (most of the audience appears to be from the City anyway.).

The humble gilt is by nature a life-threateningly dull animal. It is a government bond (an IOU) which pays a fixed rate of interest. It is used by the more timid investors - many of whom need medical attention when the FT-SE 100 index of leading company shares drops more than 20 points - to provide for the likes of school fees and retirement.

Of the pounds 200bn plus of gilts in issue, some pounds 20bn is in the hands of these "risk averse'' (a must phrase for the bluffer) private investors.

Nevertheless, the gilt market is a minefield for the rookie investor and bluffer alike. The jargon is unfathomable and the forces that drive investment performance are confounding.

There are shorts, there are mediums, there are longs. There are taps and taplets. There are running yields and redemption yields. There are even reverse yield gaps to ponder. And just when you thought it couldn't get more complicated, the Chancellor this week confirmed plans to split the wretched things into their component interest "coupons'' and underlying loans, creating a so- called strip market.

Oh, and he is going to change the tax treatment of gilts into the bargain. Not that it should bother us mere mortals. Having prompted a massive intake of laudanum among gilt investors when he threatened to charge their miserable capital gains to income tax, Cuddly Ken has been obliged to muzzle a snarling Inland Revenue and soft soap the voter (sorry, investor).

Capital gains on bonds will be taxed as income from next April. But you will only pay tax on gains if you own more than pounds 200,000 worth.

So is it safe to invest in gilts? Well, yes. Provided you can understand them. Which for the beginner can be like driving on the Continent for the first time.

There is no more pitiful sight than a gilt novice trying to bluff his or her way out of trouble.

The first obvious sign of distress becomes apparent when discussing the market. Unlike shares, the common performance benchmark is not price but the yield. Old hands know that if yields go up, prices go down and vice versa.

Thus the opening remark: "I see that bond prices have fallen'' is the utterance of a buffoon. A seasoned investor would have said: "I notice the yield on the Treasury 8 1/2 per cent 2005 is nudging 8.15 per cent.''

Gilt yields - which because of price movements are not the same as the fixed interest coupon - normally vary with the period of the loan. Longer dated gilts should yield more than shorter ones.

This gives rise to the yield curve, which plots the overall rate of return from all government stocks. The problem is that political uncertainty and fears over inflation can play merry hell with the normal order of things.

You need a degree in pure mathematics to even begin to comprehend what it all means.

Indeed, some would question whether you should commit your life savings to an investment where a key performance measure, the redemption yield, is calculated as the value of y. As in the equation P+ AI = vf x [d + c/y (1-v)] + 100vt?

If you think this is a joke, rest assured that it is not. But if you want to know what the algebra stands for - ring the Bank of England. It's their brainchild.

Back to the building society deposit account.