View from City Road: Few buyers at the great gilt sale

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The Independent Online
ROLL UP, roll up for the great gilt sale] The Government needs to raise pounds 1bn a week in the next financial year and it will have to use some high-pressure marketing tactics if it is to fund its requirements through gilt issues.

Large investors do not want any more gilts than they hold already. Overseas investors are worried about further falls in the value of the pound. And individuals, while reviewing the attractions of keeping their money in building societies now that interest rates have fallen, have limited resources.

The task of selling these unwilling investors pounds 50bn of gilts would daunt most sales teams. But most sales teams do not have the tools that are available to the Treasury. These include tax carrots and sticks, not just for individuals but also for pension funds.

There is a large lobby in the City for opening up personal equity plans to gilts. The idea is that the tax privileges would make gilts more attractive and so encourage individuals - who bought more than pounds 2bn of gilts in the first nine months of last year - to fill their boots.

There are, however, a number of reasons for thinking this change unlikely. Their very name suggests that PEPs were designed to foster share rather than debt ownership. And the Inland Revenue has gone out of its way to keep it like that - fighting Save & Prosper in the courts to demonstrate its point. There is also a risk of money going into gilts at the expense of National Savings, which would leave the Government no better off. And if it extended PEP rules to cover its debt, would they also cover corporate debt?

Fund managers meeting at the National Association of Pension Funds conference in Eastbourne this week might also like to consider the possibility of tax changes designed to encourage them to hold gilts. Despite growing fears about pension funds' over-exposure to shares, their holdings of gilts remain stubbornly low at about 5.7 per cent of the average portfolio.

One suggestion is that the Government could tax income received by pension funds and then issue a series of low-coupon gilts. Another more draconian idea is that pension funds would keep their exemption from tax only if they held a proportion - 10 per cent would raise pounds 15bn - of their assets in bonds. Under EC rules there could not be any discrimination in favour of the UK government. Tempting though it might be, a change to pensions tax would be seen for what it is - financial gerrymandering.

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