View from City Road: Leaner pickings in the money market

The Government's decision to cut back on gilts sales next year by pounds 7bn - one of the factors encouraging the bond and equity market - has a sub-plot. Discount houses and foreign banks have been complaining about the way Barclays and National Westminster have become the Bunker Hunts of bill trading (after the famous brothers who nearly cornered the silver market).

When the Bank sells gilts for the Government, cash is drained into the Exchequer, creating a shortage of money in the banking system. Commercial banks fill in the shortage by selling bills - short-term IOUs issued by companies - to the Bank of England. Heavy gilts sales have brought pounds 14bn of this paper into being, and the Bank often buys pounds 1- pounds 2bn of it in a day.

The result of such large and variable daily purchases by the Bank is that short-term money market rates - borrowing overnight or for a few days - have become extremely volatile. Banks that need short-term loans are sometimes forced to pay very high rates of interest.

Barclays and NatWest own a lot of the money market paper. Their critics claim this gives them too much influence over short-term rates, which are directly linked to bill rates. By both owning a lot of bills and deciding the timing of sales, they have an ace up their sleeves, which competitors claim amounts to manipulation.

With pounds 7bn less gilts sales in 1994-5, the paper mountain in the money markets could be halved in size. This should make short-term rates less volatile and the pickings for the two clearers will be leaner.