View from City Road: No good news for the gilts market

Renewed turmoil in the gilts market is hardly surprising in view of the probable drubbing the Tories are likely to get in today's local elections. Dealers are rightly worried that foreign holders of gilts who have not sold already would scramble for the exit in the event of a significant shift in the political landscape.

But it's not just politics; more fundamental factors are also at work. What sparked the sell-off were rumours that the Fed was preparing to defend the dollar by raising its key discount rate, now 3 per cent, for the first time in five years. In fact this seems highly unlikely to occur before the Fed's policymakers next convene on 17 May. The rumours were nevertheless enough to floor the market and finally lay to rest that long-held fallacy that stocks and shares in the UK might manage to decouple from what's going on in the US. For the gilts market at least, yesterday's widespread central bank intervention served to underline that upward pressure on US rates could be prompted as much by the need to support the dollar as robust economic growth.

Worries about UK base rates abound, too. All the evidence suggests that consumers, and Britain's fledgling economic recovery, have been completely unfazed by April's tax increases. The latest money supply numbers showed that on a six-month annualised basis M0 expanded by 9.1 per cent, the fastest expansion rate on this basis since September 1988. A further base-rate cut looks less and less likely, even if the prospect of an increase is still only a distant spectre. Aside from a politically inspired cut to counter electoral disaster, it is hard to see where the good news for the gilts market will come from.