UK debt chief says demand back after mini-budget debacle

Demand for British government bonds has recovered from the damage dealt by the market turmoil which followed then Prime Minister Liz Truss’ mini-budget last year, the chief executive of the UK Debt Management Office said on Wednesday.

Robert Stheeman, who is responsible for selling 237 billion pounds ($295 billion) of British gilts to investors this financial year, said he had been impressed by the rapid rebound.

“Considering the challenges that the gilt market faced last year, the speed with which conditions have returned to normal and the extent to which the market has stabilised I think is notable,” he said.

The recovery included renewed appetite from foreign investors, he told Reuters after a mid-year update on the DMO’s issuance plans.

“I talked about how quickly things return to normal, and that definitely includes international interest,” Stheeman said.

In September 2022, the Bank of England (BoE) was forced to intervene in the bond market – buying 19 billion pounds of long-dated and inflation-linked gilts – after record price falls in response to Truss’ budget plans put some pension funds at risk of collapse.

Since then, Prime Minister Rishi Sunak has put Britain’s finances on a more orthodox course.

Britain no longer pays a big risk premium for its borrowing, but outright interest rates are still high, reflecting a global rise in central bank rates.

Just a month ago, 30-year gilt yields reached their highest since 1998 at 5.209 per cent.

However yields have fallen in the past month, as investors judge central banks, including the BoE, will cut rates in 2024.

The DMO announced minimal changes to its plans on Wednesday, lowering gilt issuance by just 500 million pounds to 237.3 billion pounds, wrong-footing some investors.

A Reuters poll had pointed to a 15 billion pound reduction.

Instead, the DMO used lower borrowing needs created by strong tax revenues to reduce net issuance of short-dated Treasury bills by 10 billion pounds.

Before the pandemic, the DMO regularly used changes in T-bill issuance to smooth out small changes in borrowing needs, and Stheeman said the decision represented a return to that.

 

BOND SALES

Stheeman said the DMO’s debt issuance plans had not been influenced by the BoE’s quantitative tightening.

In September, the BoE said it would reduce its gilt holdings by 100 billion pounds over the next 12 months, after an 80 billion pound reduction during the previous 12.

“Categorically it has not affected our decisions or our strategies,” Stheeman said.

Some investors have said BoE sales of long-dated gilts were having an outsize impact on that part of the market, which is typically less liquid.

BoE Governor Andrew Bailey told lawmakers on Tuesday that sales had only added 0.1-0.15 percentage points to yields.

However, the DMO did need to consider changing demand, which included a slow long-term reduction in pension funds’ need for long and ultra-long gilts, Stheeman said.

“We have over the last 10 years seen a very slow trend towards that demand shortening compared to where it was previously, in part due to the growth of pension scheme buy-outs. I wouldn’t be surprised if that trend were to continue.”

Britain issues a higher proportion of long-dated debt than other countries.

Overall gilt issuance is also at a record level on a net basis. While gross issuance is half the 486 billion pounds sold in 2020/21 during the pandemic, the BoE is now a net seller, rather than a heavy buyer as it was in 2020/21.

Issuance is set to remain high for years to come. The DMO estimated ‘gross financing needs’ would rise to 277 billion pounds in 2024/25 and fall only slightly to 270 billion pounds the year after. Gross gilt issuance is a little lower than this, as the total includes around 10 billion pounds raised direct from household savers and other sources.

“If you look at the projections … we’ll stay in business for a little while yet,” said Stheeman, who is due to retire next year after more than two decades at the DMO.

($1 = 0.8025 pounds)