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Trending: The government gets a gilts complex

Published: 21:41 10 Aug 2016 AEST

Bank of England

The government bonds market dwarfs the equities market in terms of size but rarely gets much media coverage on account of being stultifyingly boring.  

Government bonds, or gilts as they are known in the UK, tend to march in lock-step when it comes to price movements, owing to the ease with which the return can be calculated; so, when interest rates go down, gilt prices go up, and when interest rates go up, gilt prices go down.

Ditto for the perception of the direction in which interest rates are likely to be heading, which, judging by some heavy-handed hints by Bank of England policy makers, looks to be further south, even though the Bank of England’s reference interest rate is already close to zero.

Hand-in-hand with the government’s unprecedented interest rate policy has been the practice of quantitative easing, a jargon term that describes the Bank of England’s practice of buying gilts off institutional holders – banks, pension funds and the like – in order to inject some liquidity into financial markets.

Gilt yields in the UK have hit record lows, which is another way of saying gilt prices have gone up - the interest rate, or coupon on a gilt is usually fixed, so therefore when the price goes up, the yield goes down.

As a result, the Bank of England found itself in the unusual position of not finding enough takers of its offer to buy £1.17bn of gilts, coming up £52mln short of its target.

This does not bode well for the £60bn gilt purchase scheme the Old Lady of Threadneedle Street announced last week.

Interrupting a train of fault

 

Having a moan about rail services is also boring but it is also compulsive.

The company set to incur the ire of commuters in East Anglia and parts of Hertfordshire over the next nine years is Abellio, the Dutch company that is referred to by disgruntled passengers by a different and decidedly ruder name.

The company was awarded the £1.4bn contract by the government, and is pledging more than 1,040 new carriages across the region and a cut in journey times by an average of 10%.

Free Wi-Fi for all passengers on trains and at stations is all very nice, but what passengers mainly want is for the trains to run on time and to be able to get a seat in the rush hour.

To be fair to Abellio, as a regular user of their services, I have found very little to complain about, which has taken some of the “fun” out of commuting.

Meanwhile, in other news, Eurostar rail workers are to strike for seven days in August in support of their push for a better work/life balance.

"Our train manager members at Eurostar have a heavy commitment to shift work and unsocial hours and are sick and tired of the company's failure to honour agreements,” said the unfortunately named Mick Cash, general secretary of the Rail, Maritime and Transport union.

Diamondiferous 

Let’s move on from such mundane matters as getting up at three in the morning so you can be shouted at by irate, delayed holiday-makers, and move on to the glamorous world of diamonds.

Judging by the negative share price reaction today of Karelian Diamond Resources Plc (LON:KDR), the mining end of the diamond chain is a lot less glamorous than the prancing about on the red carpet at a film premiere end.

The company’s shares took a shellacking after it said that analysis of an extensive database of information over its diamondiferous Lahtojoki kimberlite pipe in Finland had confirmed the potential for it to become a profitable open-pit diamond mine.

“I am delighted that excellent progress is being made in relation to the technical data which has been received,” said Professor Richard Conroy, chairman of Karelian.

The market did not share his delight, though it is hard to discern why.

Petra Diamonds Limited (LON:PDL) found the market equally hard to please, after unearthing a 138-carat stone in South Africa at the world-famous Cullinan mine.

The white diamond will be sold as part of Petra’s next sales process at the end of the month in Johannesburg.

Colour the market unimpressed; the shares were little changed.

It is the largest in a spate of big diamond finds, which experts have attributed the recent trove of gems to a change in the sorting and extraction processes. Previous processes may have resulted in the loss of a number of larger stones.

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