Well, what is this all about? The trend in the gilt market:
Recall two pieces of conventional wisdom. One, the end of QE spelt doom to gilts. Take away that one big sucker-buyer and they will fall out of bed*. Two, if there’s a hung parliament, the great British Politician will spend months and months dithering, which means failing to take Tough Measures.
This graph suggests that, at the least, such conventional wisdom would not have provided a hedge fund with a cast iron trading strategy. See Ed Conway on this. Doomsters, in my experience**, tend to lose money.
So what is going on? Looking at the interest rate markets, it appears that general expectations for continued lower rates are remaining firm. At the begining of Feb, people thought rates in September 2011 might be 2.8%; that has fallen to just over 2%. This can stem from two causes: supply or demand. It is possible that the lower expected deficit is a part of this. It could be that the worsening European situation has lowered expectations of demand. But I wonder if it is a rebalancing story.
As the BBC reports, today’s Bank figures suggest less lending for mortgages than expected. Meanwhile, Manufacturing is going gangbusters. Now, imagine you are the Bank. Would you worry about growth coming from the latter source? I should think no: because it has a big export element, and does not reflect overheating domestic demand. But if the stories were reversed – which they were until just a year ago – you would have a real dilemma – households piling on more debt, manufacturing struggling. The headlines today suggest the sort of mix of growth that all the parties want, and one that does not in my view put pressure on rates.
Sometimes – in fact, mostly – stuff happens in the real world that is nothing to do with the noise and posturing of politics. Good thing too.
*technical City phrase, to understand which you need an awful lot of money.
** and it is long experience. From about 1996 to 2004 I took endless phone calls from people predicting doom, and hoping to profit from it. They didn’t, on the whole.