U.K. BUDGET SEEN BOOSTING GOVERNMENT BOND MARKET
Chancellor of the Exchequer Nigel
Lawson's budget contained virtually everything the government
bond (gilts) market had hoped for and is likely to help prices
race ahead in coming months, analysts and traders said.
    Indeed, in the first half hour after Lawson completed his
speech, gilt prices soared about 1-1/2 points, an extremely
sharp gain in such a short period of time. Overall, they rose
about two points on the day.
    "This budget was incredibly bullish for the gilts market,"
Morgan Grenfell and Co Ltd economist Stephen Bell said.
    Analysts said that in the light of the reaction to the
budget in the gilts and U.K. Money markets, U.K. Commercial
bank base rates are likely to be cut by as much as a full point
tomorrow.
    Analysts said the market's euphoria was simply a reflection
of supply and demand. The crucial piece of news in the budget
was that the Public Sector Borrowing Requirement would be held
to 4.0 billion stg.
    By comparison, a year ago, the PSBR was set at 7.0 billion
stg.
    The lower PSBR means the Bank of England will have to offer
far less new stock to the market to meet its funding needs and
the scarcity factor is sure to drive prices up further,
analysts said.
    "The PSBR at four billion is lower than anyone realistically
expected," Bell said. Most market expectations called for the
Chancellor to announce a PSBR of about 5.5 billion stg.
    S.G. Warburg Securities Co Ltd economist John Shepherd said
that overall, the Bank will have to sell about two billion less
in new securities next fiscal year -- a cut of about 15 pct in
total new issue volume.
    Chase Manhattan Securities Ltd international economist Andy
Wrobleski noted the Bank has already raised about 1.8 billion
stg of next year's funding needs this year via a series of tap
issues.
    The issues have been in a partly-paid form where the full
price does not have to be paid until the start of the new
fiscal year and therefore they are not counted in the current
year's fund raising.
    But the Bank of England will also be constrained from
issuing gilts in the conventional form by its promise to try
out a U.S.-style auction system in which firms bid for new
stock.
    The Bank will also have to offer at least one index-linked
issue where the rate paid to investors is tied to the Retail
Price Index, leaving about one to two billion stg, in total, to
be raised in the form of traditional stock.
    Analysts noted that the budget contains provision for a two
pence in the pound cut in the basic rate of income tax, in line
with most market expectations, although some operators had
expected a cut of up to four pence in the pound.
    The gilts market approved of the more modest tax cut,
Shepherd said, because "If it was more than two pct, they would
have become concerned about the economy heating up again."
    Also, a cut of two pence in the pound suggests that if the
ruling Conservative party is re-elected, another two pence cut
can be offered at budget time next year.
    Analysts said the gilts market may also be building steam
on the political implications of the budget which suggests an
early election.
    "All the goodies in this budget will be in place by the
middle of May," Morgan Grenfell's Bell said. "This makes a June
election very likely."
    Bell said some politically popular provisions omitted from
the budget, such as lifting the ceiling on the amount of
mortgage eligible for tax benefit and some provisions on
pensions, could not have been implemented until autumn anyway.
    At that rate, they would have been of little use for a
political party expecting to call an election in June.
    Also, analysts noted, the budget does not go overboard with
measures that are seen as generous to the wealthy.
    "This will be a difficult budget for the (opposition) Labour
party to attack," Shepherd said.
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