90. Figure 38 shows the stability of the Gilt market in the six months around the issue of the LCR bonds. The long end of the market is more volatile than the 10 year area so we should expect any volatility to show up here more clearly.
91. The 30 day average volatilities measured as a standard deviation around the mean yield for the quarter around the issue are as follows:
| Q3 1998 | Q4 1998 | Q1 1999 | Q2 1999 |
6% Tr 2028 | 13.6% | 10.5% | 10.6% | 13.9% |
6% EIB 2028 | 13.7%* | 12.7% | 11.7% | 14.3% |
* 2 months data only
Source: Bloomberg
92. It can be seen from this table that volatility in Q1 1999 was lower than in the months immediately preceding and following it. We believe this was a relatively stable period in the market in comparison to the last 2 quarters of 1998 when the consequence of the hedge fund crisis had a dramatic effect on the Gilt market. Nevertheless, selling over £2,650 million of sterling bonds would have disrupted the market if a market management strategy had not been in place.
93. It is difficult to assess any cost incurred as a result of the hedging strategy. However, it appears that the Government's advisers attempted to verify prices at which trades were dealt and the correspondence we have seen suggests that the lead managers conducted the trades relating to the management strategy away from their Gilt desks to ensure no conflicts arose. Given the fragility of market sentiment in the first quarter of 1999 and the size of the GGB placing, it is our view that the market management strategy reduced the risk of an adverse market movement which could have resulted in the GGBs being issued at a higher interest rate.