London Market: Rising house prices signal inflation concern

BONDS may fall this week, prolonging an eight-day slide that has driven yields to a month's high. Rising house prices signal higher inflation, as well as increasing concern that the Bank of England may raise the cost of borrowing.

"In the light of recent rate hikes and central bankers' comments, investors will pay attention to house prices," said Nick Stamenkovic, senior bond strategist at Idea Global. "We expect those to remain strong, pushing down gilts." He expects a further rate increase in February, but said it could come as early as January.

Gilt yields rose, with the benchmark 10-year gilt yield climbing 16 basis points to 5.31 per cent on concern that inflation will grow. Meanwhile, oil prices climbed to their highest in nearly a decade, and the IMF warned the UK economy was in danger of overheating. In addition, government figures showed an increase in family spending.

"Gilts are struggling," said Steven Pearson, an analyst at Halifax. "That's due to a combination of interest-rate pessimism and a poorer outlook for the inflation rate."

Stocks may rise as computer-related shares such as ARM Holdings and Marconi extend a two-month gain on optimism for sales and earnings growth. "The internet revolution and the resulting revenue growth are driving gains," said Richard Lewis, manager for WorldInvest. The 14 per cent rally in the FT-SE 100 index since 18 October smacked of "crowd psychology", as investors bought up stocks for fear of missing out on gains.

Carlton Communications and National Westminster Bank may lead media companies and banks higher on speculation that they may be the target of takeover bids.

ARM, which makes microprocessors for mobile phones, has increased almost nine-fold this year, forcing many institutional investors to buy the shares in anticipation it will enter the FT-SE 100 index.

Psion, maker of hand-held computers, has climbed four-fold, while Marconi has jumped more than 70 per cent in two months. "There's a technology frenzy," said Tony Hardy of the Church Commissioners. "The world is waking up to its true benefits."