Companies squeezed out of bond market by government
Hurry hurry while stocks last? Companies that want to issue bonds because they cannot borrow may find the government has got there first.
The price of rescuing the banks and keeping public spending high when taxes are falling is being seen in the gilts market. The Treasury is issuing government stock like it was confetti. Some £225bn is expected to be issued by the UK this year – 75 per cent more than last year – but other world governments are selling stock in record quantities too: the US total is likely to be $2,000bn this year.
Are there enough investors to buy? It helps that pension funds and insurance companies have burned their fingers on equities and are more disposed to buy bonds, but the supply risks exceeding demand. Governments have not only to issue stock to cover budget deficits but also to replace past debt that matures.
The UK total is about half the size of the annual public sector spending or revenues.
One attempt to sell stock has already failed to find buyers this year. The March gilts auction of £1.75bn of stock was the first flop in seven years and the government’s Debt Management Office has thus chosen to bring in four big investment banks (one of which is state-owned) at a fee of £100m to sell the latest £25bn batch of 25-year stock by syndicating it.
Not surprisingly yields have risen in an attempt to attract buyers, moving from under 3 per cent in March to over 4 per cent recently. That cannot totally be because Britain is deemed a greater credit risk than three months ago.
But with governments selling so much fixed-interest stock, what chance has business got? Companies will have to offer increasingly attractive coupons to persuade investors to choose their bonds over public ones. Everything points to interest rates rising.
