The most fantastic year in bonds MONEY
NICHOLAS DAVENPORT
:This was the year which saw British govern- ment credit sink to its lowest ebb. Poor shades of Hugh Dalton! In his day 31 per cent War Loan had touched 1081. Under his protégé James Callaghan it fell below 50 (now 481). Bank rate, raised to 8 per cent on D-day, has never been so high this century except for a moment in the First Woad War. This , 8. per cent is a rate which shrieks out to every entrepreneur : Don't adventure! Don't invest! —and to every saver : Don't buy government bonds! Don't put your faith in money stocks.
Yet the year started with some promise of cheaper money. The gilt-edged market had recovered from the dear money shock of the July measures of 1%6. With interest rates falling abroad Bank rate had been reduced on 26 January from 7 per cent to 64 per cent, on 16 March to 6,per cent, on 4 May to 53 per cent. In the twelve months to 30 June the balance of payments deficit had been reduced to under £40 million. On the strength of this false dawn millions of institutional money had poured into government bonds in the first half of the year. Insurance companies alone had put in £844 million against only £21 million in the whole of 1966 and £473 million in the whole of 1965.. Mr Callaghan in his budget speech looked forward to 'continuing strength in the gilt-edged market and a good demand for government securities.' But by July the market's strength had collapsed. Interest rates in the United States had begun to rise again and our balance of payments, not helped by the closing of the -Suez Canal, had once more plunged deep into the red.
Thereafter money poured out of the gilt- edged market. In the six months to the end of March the Treasury had managed to sell to the public about £1,000 million of stock but about £800 million went back into government hands in the next six months. In September some £550 million of Treasury 63 per cent 1971 stock was issued at par to pay off the holders of steel stock. It now stands at 962. On Devaluation day £600 million of Treasury 61 per cent 1995-98 stock was issued on tap at 94—and no one has yet taken it up. Yields of up to 71 -per cent to gross redemption can now be obtained on medium dated stocks and over 73 per cent on the undated.
As I write, a recovery in the gilt-edged market has been staged on the optimistic assumption that Mr Jenkins's promised cuts in government expenditures—to be announced next month— will restore confidence. But how far can this recovery go when American bill rates are still moving upward? It is obvious that control of the money market in the United States has been lost. Congress will not impose the 10 per cent surcharge on taxation demanded by the President and the budget deficit of 1967-68 is likely to exceed $20,000 million. So the Ameri- can. Treasury has to finance itself on short term at ever-increasing yields to the investor. The last offering was made at 51 per cent. No doubt . 6 per cent will be the next. First-class industrial borrowers are now having to pay over 73 per cent for their loans.
So what was the sense behind the raising of our Bank rate to 8 per cent? To try to capture foreign hot money (which is always an 'in and out' affair) in these hazardous circumstances is surely crazy. The Euro-dollar rate will probably rise further and our own Bank rate may be driven to 9 per cent if the Treasury insists on pursuing the conventional madness of a chase after international hot money.
Clearly, the rush out of money into real (equity) values, which I reviewed last week, has not improved the outlook for government bonds. In an interview before Christmas for the BBC Woman's Hour I was asked what advice I could give to the family which had hitherto put its savings into government bonds. I felt bound to reply that until we can see an end to the fall in the value of money it would be much wiser to put the family savings—if there are any, which is unlikely if the breadwinner is an underpaid manager or clerk or shop assistant— into equity shares through the medium of a unit trust. Fortunately the seventy-seven Trustee Savings Banks are about to launch their own unit trust and I have no doubt that depositors should immediately switch their money into this equity portfolio as soon as it is set up. The Trustee Savings Banks now have nearly ten million depositors—new depositors have appar- ently been joining at the rate of 240,000 a year— and their total funds exceed £2,400 million. The setting-up by the savings banks of a unit trust portfolio consisting entirely of equity shares is good news to many families this Christmas who have hitherto seen their savings depreciate in real value in money deposits and bonds.
There is also good news for small savers in the trade union world. The Trades Union Unit Trust, as its chairman Lord Hirshfield has recently announced, is about to extend its scope to individual trade unionists. The scheme, I understand, will be announced early in the New Year and will provide life cover for the sub- scribers. There are, of course, many other unit trusts which provide savings schemes linked with life assurance and the Trades Union Trust is wisely following the prevailing fashion. But it is a good fashion. It is a development which the Treasury should bless, for it provides a genuine boost to the -savings movement. Not only does the subscriber obtain income tax relief on his annual subscription but he is able thereby to buy his units at a discount.
To what extent these equity-linked life policies have been responsible for the upsurge in the unit trust movement this year I do not know but it is significant that the total funds in unit trusts at the end of November were £846 million against £559 million twelve months ago. A savings movement which is collecting savings at the rate of £300 million a year is a stabilising force which the Treasury must welcome. Mr Roy Jenkins, I hope, will encourage this move- ment and not discourage it by cutting down the income tax reliefs. The best answer to this year's fantastic rush out of bonds is to divert it into equity-linked life policies.
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