Gilts and innocence

If anyone thought that investors don't want to lend to HMG at any price (not me guv), that idea has been well and truly exploded by the handsome success today of an auction of £1.1bn of index-linked gilts.

What that shows is that - on top of growing wariness about the sheer size of the government's borrowing needs - there were some special factors contributing to yesterday's flop (see my note on all this).

However there is evidence of investors wishing to take fewer risks when lending to the British state.

Yesterday the Debt Management Office was asking for a 40-year conventional loan. That's a long time to wait for your money back.

And the maturity of that loan means it can't be dumped straight away on the Bank of England - which is buying gilts with maturities between five and 25 years as part of its anti-deflationary, quantitative easing programme.

So for both reasons, yesterday's gilt was riskier than today's offering, a 13-year loan that provides protection against the effects of rising inflation (which is why it's called an index-linked gilt, for the uninitiated).

In fact you could argue that today's success shows that investors fear the Bank of England's crusade against deflation may - before too long - see the beast of inflation rise from the pit.

We're probably going to have to wait till we see auctions of more conventional gilts before we can gauge whether the government will have difficulty borrowing the colossal sums it'll need over the next couple of years.

But those who think that yesterday's flop is a sign of an imminent fund-raising crisis can't point too much in the way of market prices by way of evidence.

In fact as Laurence Mutkin of Morgan Stanley has pointed out, the measure of the market's perception of the probability of the UK defaulting on its debts - the credit-default-swap premium - barely moved yesterday.