Gilts traders see profit slip to pounds 59m

GILTS traders' profits fell last year despite a boom in sterling bonds, but there was a flood of new capital into the market, which intensified competition.

The Bank of England said gilt edged market makers (Gemms) made net profits of pounds 59m after overheads and tax, a fall of pounds 5m on 1992.

But net new capital brought into the market was pounds 164m, bringing the total to pounds 733m, higher than at the time of Big Bang in 1986.

Much of the early capital injected into the gilts market was lost, because of severe competition at a time when government borrowing was falling and the market was shrinking.

Last year Gemms expanded their businesses and one new firm, the Japanese-owned Yamaichi Gilts, set up shop. There are now 20 Gemms.

With more capital employed, average returns fell from 13 per cent in 1992 to around 9 per cent last year.

Though profits fell the Bank said they were made on a 'more consistent basis' than in 1992, when there were two particularly sharp market movements after the general election and the suspension of sterling's membership of the exchange rate mechanism. On both occasions, some Gemms are believed to have made very large profits.

In 1993, the big and sustained rise in gilts prices helped profits, but there were no spectacular opportunities to make money. The Bank said that a handful of firms made losses in 1993, but this had happened in previous years.

It added that a large part of the new capital was to support businesses other than gilt-edged market making itself. These related businesses, which some firms run inside their Gemms and others outside, include other sterling bonds and the management of gilts holdings for other parts of the same group.

The number of stock exchange money brokers and inter-dealer brokers remained unchanged at eight and three respectively.

Turnover in shares hit a record in January, according to the London Stock Exchange. At pounds 65.3bn UK turnover was 14 per cent higher than the previous high of July 1987 while trading in foreign shares at pounds 67.5bn was 15.6 per cent above its previous best in August 1993.

In a second article released in advance of the Bank's quarterly bulletin this week, the Bank said a switch to fixed-rate company and private borrowings would reduce the impact of interest-rate changes on the private sector.

But the rate changes would continue to have the same effect as now on the foreign exchanges, which are influenced by short-term floating rates in the money markets.