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Gilt Selling, Gilt Buying

08 January 2010

The Technical Trader's view:



The drama of the Gilt is three-fold: 

First, the repeated failure of the market at the All-Time-High from 124.95. 

Second, the pull back through the support from the Prior High at 116.08 which has held the market up since June 2009. 

Third, while the market has been held up by that support, the sideways price action has described a complex but coherent continuation pattern which looks on the point of completion ... if the market closes beneath the Neckline currently at 115.97. 


Short-term a precise bear channel has been created. 

Note too, the recent rally to the top of the channel which failed not only (1) at the falling diagonal of the channel but also (2) at the two prior Low resistances - at 114.73 and much more short-term 115.04. 

There are enough powerful bear forces above the market to stymie any buying 

The Macro Trader's view:

Bearish at last! The Gilt's many lives seem to have finally run out. 

Throughout 2009 the Gilt seemed to possess almost Teflon qualities as the Government pumped money into the economy to cushion against what has become the longest recession on record. In the process the UK budget deficit and debt to GDP ratio have soared leaving the UK at risk of a Sovereign credit downgrade. 

But now the worst of the recession seems over, with Q4 GDP due later this month expected to show the UK economy emerging from recession. Traders have over recent weeks turned their attention to the Governments plans for restoring the public finances to a sustainable path. 

A major source of support for the Gilt for a long time now has been the Bank of England's QE program, but this is set to conclude at the end of next month. While the Bank will not be draining the emergency liquidity injected, its absence from the secondary Gilt market is likely to prove a key factor in what we expect to become a classic bear market, so it is important the Government retains market confidence in its plans to reduce the deficit 

When recession hit, extra spending by government was accepted as a necessary step to avert financial market collapse, but now that threat has passed the government should be looking to cut spending. The debt reduction plan they published late last year is regarded by virtually everyone as woefully inadequate. 

But since a General Election is due by May/June of this year the credit rating agencies and investors, took re-assurance from a substantial opinion poll lead enjoyed by the opposition Conservative party who have clearly stated their main priority, if they win that election, will be to substantially cut the deficit and cut spending. 

However, over recent weeks that has lead narrowed, and although it has since partially recovered, the event focused the minds of traders to what would happen in a hung Parliament. Basically, disaster! The deficit would continue to fester and the rating agencies would reduce the Sovereign credit rating, raising the cost of funding the debt and making eventual adjustment even more painful.

Then as if that wasn't enough for the Gilt to handle, two ex-cabinet ministers have called for a leadership vote, placing a question mark over Brown's authority. 

In short, the Gilt is burdened by a runaway deficit, runaway borrowing, a government that thinks it can bamboozle the electorate and the markets over its debt reduction plans and now even greater political uncertainty. A bear market in Gilts looks odds.

 Mark Sturdy

John Lewis

Seven Days Ahead

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