View from City Road: Gilts sell-off has variety of causes
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Your support makes all the difference.The more charitable people in the gilts market do not blame the Bank of England's little interest rate cut for the sell-off yesterday. Although there were some analysts who said the timing smacked of political influence, the focus was more on the steady trickle of US funds heading home to Wall Street.
At their worst, 10-year gilt yields hit 6.6 per cent, up fully eight basis points in a trading session. More US fund managers decided that the gap between US and European yields no longer justified taking the risk that the dollar would rise sharply, depressing the capital value of their Euro-investments when measured in dollars.
As if to confirm their fears, sterling also weakened yesterday, against not just the dollar but also the mark. This trend has been a factor ever since the Fed pushed up interest rates last week, but it was given an additional spin yesterday by the passing of a chartpoint.
If the change in the US environment is pulling funds out of Europe, our own home-grown crises are giving it a push too. The other factor yesterday, perhaps equally difficult to shake off, was sleaze.
The long list of scandals that has afflicted the Conservatives - adding the death of Stephen Milligan to the Pergau dam, the Yeo love children, the Ashby bed-sharing, Westminster council gerrymandering and so on and on and on - has not merely eroded the Government's credibility with the average taxi driver. The markets, thinking ahead to bloody by-elections, have been shaken too.
The gilts market took heart yesterday from the rally in German bunds, but that in turn will need to be underpinned by the much-heralded cut in German short-term interest rates. If the Bundesbank fails to deliver next week and Britain's inflation figures fall the wrong side of the markets' median expectation of a blip up to 2.5 per cent, retribution in both gilts and sterling could be swift.
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