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THOUGHTS ON THE GILT MARKET

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Gilts, which recovered late last week from the aftermath of the 'mad cow' scare, are unlikely to be helped by the s...
Gilts, which recovered late last week from the aftermath of the 'mad cow' scare, are unlikely to be helped by the south-east Staffordshire by-election on Thursday, which the Conservatives are widely expected to lose. A defeat would reduce the governments parliamentary majority to one, adding to the current political uncertainty that has put a risk premium on UK gilts when compared to global bonds.

Gilts must also weather the storm in the US this week. The US bond market plummeted yesterday and on Friday following news that employment gains were much higher than expected last month. The creation of 140,000 non-farm jobs in March followed a 624,000 jump in February, reviving fears that inflationary pressures could emerge and erode the value of longer-term bonds. Dealers will await US producer and

consumer price data, (published on Thursday and Friday respectively), with trepidation.

However, the economic fundamentals remain positive for the UK gilt market. This morning industrial production data showed continued weakness in the domestic manufacturing sector, with no growth month-on-month in February. Overall industrial production grew 0.4%, but this mainly reflected higher energy output during the cold winter. The UK gilt market is likely to take heart from this subdued data, because of what it is likely to mean for inflation, which is expected to remain subdued.
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