Yesterday’s rally in gilts was not – on the face of it – the best of news, given that it was triggered by gloomy MPC minutes and by the Fed’s decision to prepare for a new round of US stimulus measures.
But the rise in gilt prices (or fall in yields, to put it another way) has political repercussions which could be to the advantage of chancellor George Osborne.
Yields on the benchmark 10-year gilt have dropped from about 4 per cent at the start of the year to just under 3 per cent as of last night. Yesterday’s move saw yields fall by 15 basis points to 2.97. (Short-term gilts have actually halved in recent months, as Tory MP Matthew Hancock points out in a Times column today).
These movements have no impact on Britain’s enormous stock of existing debt*. But there are positive ramifications for the wave of issuance set to take place in the coming months and years.
I spoke to the UK Debt Management Office yesterday morning. They pointed out that the Treasury is predicting £165bn of gilt sales this year, £170bn in 2011/12, £143bn in 2012/13, £112bn in 2013/14 and £87bn in 2014/15. According to my calculations that is about £677bn by the end of the Parliament.
Very rough maths would suggest that if the current trend holds (of lower interest on gilts) that could represent a saving of close to £5-10bn over the Parliament (compared to what you would have expected at the start of the year). Of course, gilt markets could bounce in the other direction.
One Labour source suggests that Osborne could use this piece of good news to announce some kind of windfall in the autumn. Or to save a programme.
You know the kind of thing:
My fiscal discipline has saved Britain’s credit rating, meaning investors are flocking to gilt markets, pushing down cost of servicing the debt mountain and making your mortgage costs lower. It means I have this windfall of £1.7bn for the current year alone, to be spent on……
(It’s rather a big figure, not so far off the £2.5bn raised by the levy on bank bonuses this year).
The argument against Osborne making that kind of statement is that it only makes sense of gilt yields don’t start rising again. And that it will be the Office for Budget Responsibility which will determine the interest rate forecast – which will not necessarily be linked to the current gilt yield curve.
* A recent rise in inflation has lifted the payments on index-linked gilts in recent months although debt interest payments in August were in line with full-year forecasts.
Jim Pickard
Kiran Stacey