15 JANUARY 1977, Page 15

In the City

The gilt-edged boom

Nicholas Davenport The speed and efficiency with which the City carries out its national duties are quite lantastic. Within four working days it subscribed to and absorbed the whole of the 750 million long-dated 'tap' stock,' reasury 154 per cent 1996—which the ireasury had issued just before Christmas. And this followed on the issue and absorption of the £500 million of Treasury 15+ per eer ot 1998 which had been completed in the rtoight ending 21 December. The like of it as never been seen before.

„This was the perfect answer to the futility aPoo int ing another unwieldy commission of Li into the working of the City ifiler Sir Harold (Bank Rate Tribunal) f.wilson. This new commission is conspicuous °r its general lack of expertise—no representation of international bodies like Lloyds icir the huge eurodollar market or the market ri overseas shares—and the inclusion, in my o.rPtilion, of the wrong City journalist from th.e Times—but no doubt Mr Clive Jenkins VriI make up for its inadequacies with a hlliarit minority report on the wholesale ationalisation of the City. Tn° come back to the gilt-edged market, it eics as if the Treasury has been overdoing referred last week to the revolution 11111101 has occurred in monetary manage(oent----a target now being given for DCE the)Mestic credit expansion) instead of taelneY supply. The Chancellor put the DCE 1,9%get for 1976-77 at £9,000 million and for '7-78 at £7,700 million which, he said, heuld provide sufficient room for industry's tteleds and allow interest rates to fall from their present exceptionally high levels. As hoe 13CE is in effect the public sector th rrOWing requirement plus bank lending to r: Private and overseas sectors minus hagrChases of gilt-edged stock by the non Public it is possible to work out what she required level of sales of `tap' stocks ett„°111c1 be to keep within the DCE targets. I 'mot bore you with the technical details of

the calculation but it works out for 1976-77 at £4,700 million. Yet in the first threequarters of the 1976-77 financial year the Treasury has already succeeded in selling to the non-bank public over £7,000 million. (The Bank of England has recorded £1,336 million for the first quarter, £780 million for the second (bad) quarter, and Mr Healey in a parliamentary answer on 21 December gave about £4,000 million for the third quarter, but that was before the market had absorbed all of the last two `long taps' of £1,250 million.) So it is obvious that the Treasury has been overdoing it—by some £2,500 million !

Admittedly the Treasury has been able slightly to reduce the high rate of interest which has been killing business—lowering Bank rate from 15 to 14 per cent by weekly reductions of per cent—but it is obvious that it could have brought about a much lower interest rate if it had not sold so much stock in the market at these preposterously high coupons of 15+ and 151 per cent. The Bank has apparently let the market know that it does not want to see a rapid decline in the rate of interest. This may be because it still wants to attract foreign money into sterling and is nervous about another run on the pound.

I cannot understand why the Bank should remain so nervous about sterling when we have just received an interim $1,150 million from the IMF and a 3500 million swap from the US and can touch the IMF for another $2,750 million this summer. Moreover, a 'safety net' for the sterling balances has now been fixed up with unexpected ease. The Bank for International Settlements has arranged a medium-term facility of $3,000 million with the 'group of ten' (excepting France and Italy) to cover any sudden or violent withdrawal of the 'official' sterling balances. At the moment 'official' balances total around $3,000 million and their holders are to be allowed to exchange into

five or ten year British government bonds in chosen foreign currencies. As the oil 'official' holders caused the sterling trouble last year by withdrawing £1,300 million, this is a sensible plan. The intention is to `run down' these 'official' sterling holdings in the interests of world currency stability. The pound shot up to $1.7255—and foreign money is pouring into the gilt-edged market.

The neurosis of the Bank of England stems no doubt from the perpetual dichotomy between the Bank's desire for dear money to attract foreign money into sterling and the Treasury's desire for cheaper money to attract domestic money into industrial investment and job creation. As readers of this column know I have always been amazed and shocked by the fact that no Chancellor—Labour or Tory—has ever tried to remove this dichotomy by running a two-tier system of interest rates—a high one reserved for the mercurial foreign depositor and a low one reserved for the enticement of the British businessman into more industrial and housing investment. A two-tier system of interest rates is technically workable and enforceable. It is a disgrace that an expert committee has never been appointed to work out the technical details, which are not difficult. In this dim twilight period when a divided Labour Government doesn't know whether it wants to make a mixed economy really work and prosper or whether it ought to make further concessions to the Marxists who want to destroy it I begin to despair of the triumph of economic reason over sloppy political emotions.

To come back again to the gilt-edged market the Bank of England announced another 'tap' stock on the exhaustion of the 'long' taps—this time a 'short' tap—£600 million of Exchequer 121 per cent 1981. This is an improvement on the extravagance of issuing 'long' taps with preposterously high coupons which have cost the Exchequer over £500 million a year extra for the next twenty years or more.

The new 'short' tap should call the attention or the investor to the attraction of the £400 million of Treasury 3 per cent 1982 which goes ex-dividend this week and technically becomes a 'short'. As I write it is quoted at just over 72, so that in five years a capital profit of around 36 per cent will be secured tax free. It is specially suitable for the high tax payer as the current yield is only a little over 4 per cent. Then there is the Treasury 14 per cent 1982 at 103 which becomes a 'short' in March. This is more suitable for the 'gross' investor who wants income, for the coupons will add up to 70 over the five years. The market is bound to boil over sooner or later but if you believe, as I do, that the long-term rate of interest must be brought down from the current 14 per cent to 10 per cent then those who don't mind taking more of a risk in a longdated stock should buy Treasury 121 per cent 1995 at 88 or Exchequer 131 per cent 1996 at 90+ or even undated 3+ per cent War Loan at 26f per cent to yield 13 per cent for ever! Why should the English work ?