MNI INTERVIEW: Brexit To Hit Sterling, Not Gilts: Debt Chief

By David Robinson

     LONDON (MNI) - UK government bonds should ride out any Brexit turbulence,

with its impact probably concentrated in foreign exchange markets, Robert

Stheeman, chief executive officer of the Debt Management Office, told MNI.

     Gilt demand has held up in the face of Brexit-related sterling weakness.

Sterling fell 6.7% on its effective exchange rate index on the day after the

June 23, 2016 EU referendum and it has depreciated by another 5.9% since.

     "Were Brexit to prove particularly challenging for financial markets my

personal expectation is that the impact would be seen fundamentally and

immediately in the currency, in the foreign exchange markets, not in the bond

markets," Stheeman said in an interview with MNI at the Euromoney Bond Investors

Forum and in a subsequent email exchange.

     "In the very short-term, a sharp drop in the currency has in recent years

acted as a catalyst for more buying," he said.

     Some international investors' utilisation of currency indices forces them

to rebalance their portfolios and increase gilt holdings when they see a drop in

sterling.

     "When I joined the DMO ... the UK gilt market had a completely different

structure and ... sterling formed something like 3% of global indices. Depending

on which index you are looking at it is much higher now," he said.

     "That has happened in spite of the fact that 16-1/2 years ago we were a

triple A sovereign borrower, which we are no longer," he added.

     With the latest deadline for Brexit Oct. 31, Stheeman said fundamentals

matter more than short-term political issues. The UK sovereign debt market is

highly liquid, based on widely-used benchmarks and attractive for currency

allocation.

     Public sector deficits have trended steadily downwards. The latest official

forecasts showed UK net debt falling from 82.2% of gross domestic product in

2019-20 to 73.0% in 2023-24, although gilt sales planned by the DMO rise to

stg117.8 billion in 2019-20 from stg98.6 in 2018-19.

     There is plenty of speculation about additional fiscal stimulus being

pumped into the UK economy in the event of a hard Brexit, but Stheeman is

determined that the DMO will not provide any fireworks.

     "I think it is incredibly important for us to be seen ... [to be]

consistent. That is what we will do," he said.

     "Given the size and depth of the gilt market, we would expect it to retain

its attractiveness over time to a broad range of overseas as well as domestic

investors."

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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