George Osborne this afternoon is trying to convince us that a hung parliament will mean higher interest rates as investors panic and the gilt market plunges.   Guido begs to differ, arguing that if on May 7 the Tories went into a “Change Coalition“ with the LibDems – the only party with a leader that admits we need “savage spending cuts”, when the Tories and Labour are being disingenuous in pretending otherwise – the City wouldn’t have a problem.

The hard evidence is clear; since the prospects of a hung parliament jumped after the first TV debate (the bookies now make it an odds on 64% probability) both the pound and the gilt market have rallied. Why?  Well the City was worried about Labour being returned and kamikaze economics being implemented by Chancellor Balls.  A Lib-Con “Change Coalition“ government with both parties committed to public spending cuts and rapid deficit reduction will actually cheer the City.  Here’s the evidence so far:

The left hand chart is the probability of a hung parliament based on gambler’s bets, the middle chart is the gilt futures price and the right hand chart is the pound against the dollar.    Osborne just quoted a number of  investment banking analyst’s old notes, RBS capital markets analysis this morning concurs with Guido’s analysis:

Weekend press good for Gilts: a) talking up the Liberal Democrats right wing credentials and how they form more coalitions with Conservatives than Labour in councils, so allegedly not that Budget-negative/sclerosis if Con-Lib coalition, which is most likely outcome at this moment according to pollsters; b) polls shift 1-2% back to where they were pre-debates.

Osborne needs to switch on his Bloomberg terminal for a reality check, gilts are now yielding less than 4%, City confidence has risen as Labour’s polling figures have fallen…