The last time the market-makers made a loss, of £12m, was in 1989, which was followed by a run of good years. Most of the 1994 losses were concentrated in the first half, which saw the worst of difficult trading conditions as UK long-bond yields rose from 6.4 to 9 per cent.
The market settled down somewhat later in the year, and roughly half the market-makers made a profit in the final quarter of 1994, presaging a more prosperous 1995.
Life for gilt-edged market-makers was made doubly difficult last year by the jump in yields coinciding with the large burden of debt the Government was selling. In 1994/95 market-makers will have absorbed some £30bn of government debt, after £50bn in theprevious period.
But with government borrowing declining sharply thanks to the strength of economic growth, market-makers are expected to face an easier task in a generally less uncertain bond environment.
The Government and the Bank of England are hoping speedily to exploit this improved climate by pushing through radical reforms in the gilts market. The consultations under way, some at an advanced stage, reflect concerns at the Treasury and Bank of England that London is losing its advantages in an increasingly international bond market because certain mechanisms are grossly out of date.
In particular, it is intended to introduce a fully open repurchase market, widening the ability to borrow government stock beyond the small group of approved gilt-edged market makers. Other large financial centres have open repo systems. The ability to attract broader international participation is seen as important for maintaining London's competitive position, and should also boost liquidity, helping the Government to reduce the cost of its borrowing.
With market participants enthusiastic about the prospect of an open repo market, the main difficulty remains overcoming worries inside the Inland Revenue. To attract international investors, most repo markets pay gross dividends, but the Inland Revenue is holding out for a compromise that will not upset its cash flow too greatly.
The authorities are confident the key repo reform will be up and running before the end of the year.
The Bank of England also wants to see preparation on gilt-stripping ready for application next year.
Commonplace elsewhere, stripping enhances flexibility in the bond market, by allowing investors to divide the gilt up, keeping the bit that they want and selling on the rest.