Bank says gilts bloodbath cost traders £60m

The bloodbath in the bond markets last year caused a sizeable £60m loss among gilt-edged market-makers. The Bank of England's annual review of how the Government funded its borrowing needs, published today, underscores the dramatic reversal in th eir fortunes after an excellent performance in 1993, as heightened inflation worries and rising interest rates triggered a sharp jump in bond yields.

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London is losing its advantages in an increasingly international bond market because certain mechanisms are grossly out of date.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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent