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Monday 13 October - afternoon update
The gilts market appears to be paying a heavy price for the Government's refinancing of the UK's stricken banking industry.
Prices among longer-dated bonds slumped by as much as £2 today as the Government made it clear it will be issuing £37 billion of extra bonds to finance the planned rescue. Dealers said the fall in yields at the long end of the market was forcing institutional investors to focus on shorter-dated issues or riskier equities in search of better returns.
The Debt Management Office (DMO) said sales of extra bonds will begin next Monday but, given that an auction of Treasury 4½% 2013 is already under way, the programme will not kick off with the sale of a five-year gilt. The DMO added that the revision to its remit does not take into account any changes to the Government's forecasts for the public finances.
The London Stock Exchange and Financial Services Authority today rushed out a statement making it clear there were no plans for bank shares to be suspended after the announcement of emergency Government funding. An LSE spokesman said, hopefully: “The market should open as normal.”
Indeed, it did with most bank shares continuing to fall. Royal Bank of Scotland, which is tapping the Government for £20 billion made up of £5 billion of preference shares and £15 billion underwritten by the Government, slipped 11.8p to a record low of 59.9p — 5.6p shy of its proposed rights issue. There will be no dividend for the foreseeable future, and therefore little incentive to buy the shares and plenty of reason for income funds to dump them. Even so, Merrill Lynch has raised its rating on RBS to a buy.
Lloyds TSB was initially marked higher after extracting renewed terms for its takeover of HBOS, down 37.7p at 86.5p. But the shares later relapsed, falling 39.1p to 150.3p. The Government has said no dividend will be paid until the preference shares are covered.
Barclays, which has refused emergency Government funding, preferring to raise an extra £6.5 billion from shareholders, rose 8.5p to 216p. HSBC was up 52p at 842p and Standard Chartered 165½p better at 1165p.
British American Tobacco shares rallied 41p 1491p as Citigroup pointed out they now yield 6.4%, which compares favourably with the 4.3% coupon on 10-year Government bonds.
Trading generally remained nervous in London as prices rallied. Experienced traders such as Hargreaves Lansdown's Richard Hunter said: “It's all about confidence, and confidence in the stock market is always a fragile commodity.”
The FTSE 100 put on a spurt, climbing back above 4000 with a rise of 167.82 or 4.27% to 4099.88. But that failed to match Friday's collapse, which saw the index slump almost 9%. It was Columbus Day in America, but investors were happy to claw back some of Friday's losses on Wall Street this afternoon. The Dow rallied 352.76 to 8803.95.
British Airways rallied 4.5p to 114.4p. Dresdner Kleinwort has raised the shares from hold to buy. Its price has been clobbered by soaring oil, falling premium passenger numbers and a growing pension deficit. But Dresdner insists these have all been priced in.
Hedge fund operator Martin “The Rottweiler” Hughes has disposed of his remaining 10% stake in Taylor Wimpey, down 2¾p at a new record low of 18p. Toscafund has sold 112 million shares while the struggling housebuilder renegotiates the terms of a £1.7 billion debt mountain with its bankers. It continues to own 18% of rival housebuilder Redrow, up 8p at 164¼p.
Retailer Woolworths firmed a further 1.19p to 5.25p. Last week it emerged that Alan Sugar had bought a near-4% stake. Debenhams fell 4¼p to 33¾p, overshadowed by the collapse of Iceland's banking system. Baugur still own 13% of its shares.
