MNI INTERVIEW: Increased UK Linker Sales Not Inflation Play

Upgraded plans for 2023/24 index-linked gilt issuance are not an inflation play but a reflection of demand and increased sales across all maturities, a leading UK debt management official said on Wednesday.

“Was increased linker issuance a (DMO) view on inflation? Most definitely not. If you look across the board, issuance was up in all categories -- shorts, mediums, longs and linkers -- against the April remit revisions,” Robert Stheeman, CEO of the UK Debt Management Office, told MNI in an interview.

Stheeman said a shift away from Treasury bill issuance meant increased sales for all maturity buckets. The government’s Autumn Statement foresees GBP28.6 billion of linker sales, accounting for 12.1% of total issuance, versus expectations for GBP26.2 billion and 10.9% in the spring budget.

The proportion of linkers remains well below levels seen in pre-pandemic years, Stheeman noted, though he declined to say whether this marked a trough for the category.

“The reduction of the unallocated amount, largely planned bill sales, was spread across the different gilt maturity segments, auctions and syndications,” he said.

The DMO sees linker demand as absolute, at around GBP 25-30 billion, rather than relative, as a proportion of total sales, he added.

MULTI-YEAR LINKER BOOST

Studies suggest that the cash savings from linkers run to around GBP70 billion over that 40-plus year period, Stheeman said. However, he accepted that on a year-to-year basis, there wouldn’t always be an upside to linker issuance.

“It doesn't mean there will always be short-term benefits. But I suppose what I'm saying is the knowledge that they have been relatively cost effective, we have not always been costly in the past, does not automatically mean that this will be the case and they may not be again in the future,” he noted.

The reduction in bill sales for debt financing purposes in part reflected consideration of their role in wider cash management. Compared to the same time last year, an easing in the collateral squeeze seen in autumn 2022 made this reduction easier, the DMO head told MNI,

Operational decisions around the remit were made following discussions with the Bank of England, which is also selling gilts as it reduces its balance sheet, though Stheeman called such talks “micro choreography” over scheduling. (See MNI INTERVIEW: Active QT Needs Coordination With Debt Managers)

WANING DEMAND

Stheeman said he was little concerned that new larger pension funds in the UK perhaps targeting infrastructure investment would lead to a significant or sudden decline in demand for longer-dated gilts.

“We keep an eye on developments, but I wouldn’t say I worry too much. Because the Defined Benefit funds is still seen to match long-term liabilities with appropriate assets. That leaves them looking at longer-dated gilts,” he said.

The need to match liabilities would remain a fundamental support for gilts, Stheeman said, even if demand wanes modestly over time.