MNI INTERVIEW:UK Syndicated Sales Help Market Digest Gilts-DMO

The surprise inclusion of GBP8.5 billion in medium-dated syndicated issuance in the UK’s initial 2024/25 funding plans will make it easier for the market to absorb what will be near-record overall gilt sales, Debt Management Office chief Robert Stheeman told MNI.

The DMO’s announcement of its second-largest ever initial remit on Wednesday “implies a lot of supply,” particularly when combined with Asset Purchase Facility sales by the Bank of England, necessitating “a well-diversified issuance plan,” Stheeman said in an interview

“As part of the remit setting process we also have to think about the number of auctions we are going to schedule and when? How large can we size a short, medium or long auction? How many operations does that imply? How many operations are we comfortable with scheduling?" he said. "And that led us to think that we have got quite a lot of medium supply ... and to consider how we can efficiently distribute such issuance to meet with demand?"

A medium-term syndication would facilitate both the operational aspects and be useful to the market in terms of being able to quickly establish a new benchmark, he added.

The overall gilt remit was slightly larger than expected at GBP265.3 billion, compared to the median of the sellside previews surveyed by the MNI Markets team of GBP257.0 billion, although this was largely due to an unchanged planned stock of T-bills.

Despite expectations of an increase in planned T-bill issuance, the DMO left plans unchanged.

"The size of T-bill tenders can fluctuate over the course of the financial year. There are two determinants as to how much. First whether we want T-bills to make a positive or negative net contribution to debt financing. and the second consideration relates to our (own) cash management operations .”

GREEN BONDS

Stheeman noted that there was no increase in the GBP10 billion in planned Green Gilt issuance, in line with government plans for green project funding.

“The size of the green gilt programme is determined by the green expenditure available,” Stheeman said.

The decline in long gilt issuance, down 2.6% in the latest remit, reflected continuing weakness in structural demand for longs rather than any direct effects of Bank of England asset sales as the central bank presses ahead with quantitative tightening, Stheeman said. (See MNI INTERVIEW: UK Long-End Gilt Market Functioning Better- DMO)

An agreement between the government and the Bank dating back to the start of quantitative easing stipulates that debt management policy will not change on the back of a monetary policy tool, be it QE then or QT now. BOE sales are not prejudged but are only material in so far as they impact demand.

“We will, from the DMO's perspective, design a borrowing remit purely on the basis of how we think our supply can be best absorbed by the market,” Stheeman said.

A driver of gradual weakening in demand for long-dated gilts has been the closure of many defined benefit pension schemes, which typically bought in that part of the curve to match liabilities.

“Because there are not as many open DB schemes left, the need for ever increasing matching of liabilities with risk free assets such as gilts is likely to decline. Market feedback suggests that the average maturity of DB liabilities is beginning to shorten and that this may have an impact on demand for some long-dated maturities. However, underlying demand for long-dated gilts is still very much evident," Stheeman said.

“I've stressed the word gradual This will play itself out in my opinion over many, many years. Potentially decades,” he said.