MNI INTERVIEW: Fall In Long-End Issuance Structural - UK DMO

A shift in UK government debt issuance from the long end of the curve comes partly because of weaker structural demand from pension funds, Debt Management Office head Sir Robert Stheeman told MNI.

The DMO’s revised issuance plans revealed on Thursday following the Autumn Statement showed a reduction in overall issuance versus September’s plans, with a more pronounced decline in anticipated longer-dated sales. Overall market conditions are much improved since last month, when September's now reversed mini-Budget sparked pronounced volatility, though still not back to normal, Stheeman said in an interview.

LONGER-END DEMAND DECLINES

The DMO announced a reduction in overall planned 2022-23 gilt sales of GBP24.4 billion compared to its September projections, to GBP169.5 billion. Longer dated issuance was cut by GBP7.2 billion.

"For a number of years now there has been a very slow and gradual shift in terms of structural demand in the gilt market from the very long end shorter down the curve to the long end and this is indeed linked to changes in the liability structure of pension schemes which have been … slowly shortening," Stheeman said, downplaying any link to September’s extreme volatility, which was sparked by liability-driven investment vehicles.

"It is not a direct consequence necessarily of the LDI situation in September and October, but it is a general longer-term trend," he said.

The BOE reacted to the market turbulence by delaying the start of gilt sales planned under its quantitative tightening programme and then changing its plans to only sell in the short- and medium-sector of the curve. But Stheeman said the DMO's approach is not dictated by Bank actions. (See MNI INSIGHT: BOE's QT Pace Known, Terminal Point Unknowable)

"We generally don't take too much into account what the Bank [is doing in the monetary policy sphere]. We design and implement our own remit structure, with debt management policy objectives in mind. We are really not trying to second guess what the Bank might or might not be doing," he said.

NOT BACK TO NORMAL

Stheeman, who told lawmakers on Oct 26 that he still saw signs of market stress, said conditions had since improved.

"Conditions are challenging, they are just not quite as challenging as they were back in October,” he said. “The long end has certainly stabilised. It was in need of greater stabilisation than the shorter end. Yields also rose very significantly at the short end but that was partly a normal reaction to monetary policy tightening.”

LINKER ISSUANCE

Another striking element of the DMO’s plans was the relative decline in inflation-linked issuance.

"The overall approach hasn't really changed ... We are committed to the linker programme overall," Stheeman said, adding that the decision to reduce the instrument’s issuance was not driven by its rising expense at a time of high inflation.

"The linker market itself is not the most liquid part of the gilt market and, it never has been. It was very stressed back in September and in October," he said.

He described the DMO’s current approach to linker issuance as "proceeding with caution.”

The government, which first announced in 2018 that it would look to reduce the proportion of linker issuance in a measured fashion over the medium term, is no longer seeking to cut their share every year, but is continuing to use the instrument to moderate inflation exposure.