28 June 2005 – Market Diary
Avid readers of this column will know that ten days ago, with the real yield at a June ‘05 high of 1.56%, we drew a trend line and tentatively predicted that those levels wouldn’t last.
It’s not that the market believes the 2% 2035 index linked gilt is fundamentally too cheap at 120.03; this asset’s price is driven by supply and demand.
The five storey early 1800s Victorian home in Belgravia costs £15m, not because the price of bricks has gone up in Central London, but because the buyers have decided Eaton Square is a nice place to live.
In a market where there are £700bn of defined benefit pension liabilities and only £7bn of 2% 2035 linker gilts, supply is increasingly dwarfed by demand. The serious hedging hasn’t started yet in the UK, continental Europe or the US.
When it does, perhaps prices will edge higher still.