Gilt-edged in the doldrums
NICHOLAS DAVENPORT
Who on earth would want to buy a government bond? A common enough question today to which the vulgar answer is 'Only a fool.' Every- one knows that the savings movement is a con- fidence trick because no government has been able to stop the creeping depreciation in the value of the money into which the savings are put. It would have been far more honest if the savings movement had gone on strike until the Treasury had offered a public unit trust for British equity shares as I have been urging since 1958. The deceit has gone on for so long that I was not surprised to hear one of the students on the BBC demanding the abolition of money.
If you look at the open market in government bonds the position is far more serious. This week 3i per cent War Loan fell to its all-time 'low' of 46„ to yield over 71 per cent. This is by no means the highest yield to be secured on a government bond. You can get practically 8 per cent on a short-dated stock. Never before has the British government credit sunk so low. It is the erosion of capital values which makes it tragic rather than laughable. War Loan has fallen by 57 per cent from its peak of 1081 on 9 January 1947; 21 per cent Treasury (Da!tons) has dropped from 1001 to 33 in the same period, a fall of 67 per cent. Seeing that the National Insurance fund and other government agencies subscribed to `Dalions' at par the loss of capital values has been catastrophic. imagine the differ- ential gain if they had bought instead British industrial equities at that time, which was on the eve of the collapse of Dalton's cheap money policy. The market rise in capital values would have been over 300 per cent. Is it not time that the manipulation of government funds be taken out of the hands of civil servants and given to those who not only understand money but know how to make money out of money?
In spite of this ghastly record of monetary mismanagement the financial institutions in the City are obliged to hold government bonds. We who sell life assurance policies, pensions and annuities have to hold them for liquidity reasons just as the discount houses have to carry 'shorts' on their books. Beim; conservative people the life managers tend to distribute their total funds over certain categories of investment in a con- ventional %%a■ 20 per cent in gilt-edged stocks. 15 per ccnt in loans and mortgage. 20 per cent in debentures and other fixed-interest stocks and 35 per cent to 40 per cent in equity shares and real property. The proportion invested in gilt-edged stocks has been reduced from nearly 40 per cent to 20 per cent, and the proportion invested in equities increased from 15 per cent to nearly 40 per cent in the past fifteen years. The reasons for this radical change are obvious. Similar reasons have compelled some discount houses this year to cut their 'short' bonds by 50 per cent. itvOf course, we are not averse to making money out of the gilt-edged market when the going is good. But it has been impossible this year. The
per cent Bank rate did not bring foreign short-term money back into London: it merely destroyed the 'short' end of the market. In February the weakness of sterling unsettled the whole market and in March the speculative rush into gold and the foreign talk of another de- valuation of sterling brought prices down with a thump at both the 'long' and the 'short' ends. Subsequently. the reassuring Washington con- ference of the gold powers. the austerity budget of Mr Jenkins and the cut in Bank rate from 8 per cent to 71 per cent on 21 March brought a few hardy speculators back into the market, but again they burned their fingers. The American re-discount rate went up to 5 per cent, the us Treasury bill rate touched 5.8 per cent. the pro- longation of the Vietnam war brought fears of long-term interest rates rising to 8 per cent or more, the deficit on the American balance of payments worsened sharply and presented a threat of devaluation to the dollar—all these untoward events caused the speculators in our gilt-edged market to run for cover and the market to slump once again into the doldrums. The Government broker has since been forced to support it on the worst days.
The present position is precarious. The fact that the American Senate has at last passed the tax bill, which aids a 10 per cent surcharge to personal and corporate taxation and takes $6,000 million off government spending, cer- tainly gives cause to hope that the Federal Re- serve authorities will before long reverse their tight money policy and allow the bond market to recover its poise—the Treasury bill rate has already dropped to 5.2 per cent—but the gilt- edged market is now worrying itself sick about our own trade returns and balance of payments. The May trade returns were undoubtedly dis- appointing with another deficit of over 180 million. While exports were reasonably good, imports were still well above the Government forecast, being the second highest ever (26 per cent higher in value and 10 per cent more in volume than a year ago).
Of course, this heavy import bill may still reflect the pre-budget buying spree, which is not likely to be repeated, but it was disconcerting to find that the first quarter's balance of pay- ments figures (not seasonally adjusted) revealed a current trading deficit of £147 million, a net outgoing of long-term capital of £128 million and a rise of £382 million in the sterling bal- ances of non-sterling 'central monetary institu- tions.' Why the Treasury persists in publishing quarterly figures instead of half-yearly for the balance of payments passes my comprehension. Quarterly figures can be misleading as well as frightening. If the Government is stupid enough to frighten our foreign creditors unnecessarily it will be forced by public opinion in the end to impose restraints on both import buying and capital exports. These may take the form, first, of prohibiting 'leads' and 'lags' and forcing importers to put cash down on import Orders and. secondly. of subjecting investment in Aus- tralia and other sterling area countries to Bank of England licence.
Mr Jenkins has done his best to improve government credit and restore confidence in the gilt-edged market. His swingeing new taxa- tion of £775 million (£923 million in a full year) swells the surplus to be transferred to the National Loans Fund from £640 million to no less than £1,338 million and reduces the net borrowing requirement for the fiscal year to only £358 million. He issued £700 million of a new short-dated 'tap' (Exchequer 61 per cent 1973) in February and paid off in cash the £500 million of 4 per cent Exchequer due on 15 March. Technically the market is trimmed for a recovery. But who would speculate on a rise in the gilt-edged market before it is seen that the balance of payments deficit is being cut and the debts owing to central banks are being reduced and not enlarged? Not mel—especi- - ally now that France is imposing import quotas.
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