MNI INTERVIEW: Gilt Sales Target Short-End Liquidity: UK DMO

The UK is again targeting the short-end of the sterling bond market curve to fund the additional borrowing required to cover the Government’s recent spending plans, taking advantage of the liquidity offered by in part by overseas investors, Debt Management Office head Robert Stheeman told MNI in an interview Friday.

The short-end of the curve is by far the most liquid, Stheeman said, helped by the fact that it attracts more foreign buyers. This makes it the focal point for locating sufficient demand when the DMO has to do a lot of borrowing quickly and revives plans used in response to both the global financial crisis and the pandemic, he added.

Debt managers in the UK will need to fund an additional GBP 72.4 billion in the next 6 months, with GBP31.2 billion set to fall in the short-end and GBP17.5 billion in medium-dated gilts. The sales come at the same time as the Bank of England are embarking on a programme of quantitative tightening that will see them as active sellers of gilts of around GBP10 billion a quarter. (MNI INTERVIEW: BOE Balance Sheet To Remain A Political Target)

EASY ACCESS

“When we have a sudden, large and unanticipated increase in the financing requirement we have to access that part of the curve that is the deepest and the most liquid and offers us the ability to raise significant amounts of money in a relatively short period of time, and these are inevitably the short and the medium parts of the conventional gilt market," Stheeman explained.

"We are clearly stepping up on the short-to-mediums on that basis," Stheeman said, with past experience showing the DMO can move to longer-dated issuance when total borrowing is lower.

The short-to-medium-end "is the sector of the market that appeals most to the international investor base," Stheeman said. Targeting that sector leaves the UK open to the charge of relying on what former Bank of England Governor Mark Carney called the kindness of strangers, although Stheeman does not like the phrase.

He said that the international investor base accounts for between a quarter and a third of all gilt holdings and while they don't rely solely on it "We need to make sure that we are keeping that part of the market on board."

One aspect of the DMO's Covid response that Stheeman does not believe will be resurrected is issuing a string of at first monthly and then quarterly remits, hoping the revised remit will get the DMO through to the full Budget, expected in November, which will be accompanied by Office for Budget Responsibility’s updated forecasts. That said Stheeman, along with some clarity on the path of future energy prices, could open the door to sizeable remit revisions, but hopefully not shorter remits.

REVISED REMIT

The latest remit “is likely to be revised again alongside an updated OBR forecast but always happens each year," he said.

Addressing a recent Bank of England survey looking at what level of additional issuance the Gilt market could absorb, Stheeman said he was wary of placing weight on hard numbers in such studies, as demand is flexible and responsive to price adjustments.

"I would personally steer clear of assuming there are always finite amount of supply at which point something definitive happens," he said, as the market has shown it can indeed absorb more "but not necessarily at the price one would ideally wish to see."

He is acutely aware that the market is rethinking its valuations for sterling and gilts and the next few days are key.

"Over the next days and weeks (I suspect we'll see) a continuing reassessment of market pricing of gilts and also of the currency, as markets digest the latest information. It may also lead to a recalibration of asset allocation by international investors. It is far too early to say how that might play out," he said.