Brown's Budget plan to prick gilts bubble

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Gordon Brown gave a strong hint yesterday he would use this month's Budget to meet demands from pensions funds for long-dated gilts.

The Chancellor said the Treasury was studying calls from bond investors. "We are considering your recommendations and listening to your suggestions carefully," Mr Brown told an audience of market professionals. "We need to understand better how the demand for long-term assets is likely to evolve and to discuss how demand and supply can better be matched."

The prices of long-dated bonds of between 20 and 50 years have surged in recent weeks, sending the yield to historic lows and triggering fears of an unsustainable bubble. The yield on 50-year index-linked gilts fell to a record low of 0.38 per cent in January.

Experts blamed new rules that calculate funds' liabilities using a discount rate based on the gilt yields. If it falls, they have to buy more to make up the gap, which drives the price up and the yield down - creating a vicious circle.

On Monday, Barclays Capital warned that an unsustainable bubble had built up, which could burst "overnight".

Last month, the National Association of Pension Funds urged the Government to issue up to £100bn of long-dated gilts to meet demand.

Vince Cable, the Liberal Democrat economics spokesman, said the Treasury should have been much quicker to recognise the increase in demand. "Finally it appears that it has woken up to the markets' request for longer-dated debt," he said.

A spokesman for the Treasury said the Chancellor's comments did not mark a shift in policy, adding that it would not comment until the 22 March Budget.