Gilt prices ease on borrowing forecasts

In a Budget that was relatively neutral for markets, gilt prices eased and consequently sent yields a little higher after Alistair Darling, chancellor of the exchequer, lowered his forecasts for public borrowing by more than expected.

But sterling was floundering, as interest rate expectations were unaffected by the chancellor’s speech and the pound was kept in its place by a broadly higher dollar.

The yield on the benchmark 10-year gilt moved 1.5 basis points higher to 3.99 per cent after the UK Debt Management Office said it planned to issue £184.4bn in 2010-11, slightly lower than market expectations. However, it will still be the second biggest year for debt issuance on record following the £225.1bn issued in 2009-10.

Divyang Shah at IFR Markets said: “Next year’s issuance appears especially high when you take into account the fact that in the current fiscal year, the Bank of England was in the market taking £200bn of pressure away from the gilt market through its asset purchases under quantitative easing.”

There was little impact on broader equity markets. The blue-chip FTSE 100 index moved modestly up from its session low, standing at 5,677.88, up 0.1 per cent on the day.

Banks moved higher on relief that the chancellor did not unilaterally impose trading levies on investment banking businesses, as some had suspected. Instead, he said any such move should be taken globally.

Mr Darling did, however, insist that Royal Bank of Scotland and Lloyds Banking Group, the two partially state-owned lenders, provide £94bn between them in new business loans over the next year.

RBS gained 1 per cent to 44.61p, while Lloyds added 1.9 per cent to 63.87p.

Housebuilders on the FTSE 250 mid-cap index were better off, however, after the stamp duty threshold for first time buyers was raised.

Bellway added 5.6 per cent to 758.9p, Persimmon gained 3.1 per cent to 459.7p and Barratt Developments climbed 3.1 per cent to 129.7p.

The pound remained subdued in the face of the stronger dollar, standing 0.9 per cent lower on the day at $1.4897.