MNI INTERVIEW: UK Debt Chief Sees Robust Demand From Abroad

-Shift To Shorter, Conventional Gilts Appeals To Sovereign Wealth Funds

-Stheeman Says DMO Can Maintain High Pace Issuance In August If Needs Be

By David Robinson

     LONDON (MNI) - The shift to shorter-dated conventional gilt issuance by the

UK Treasury, as the Debt Management Office strives to meet the government's

urgent need for funds, should help ensure that demand from overseas buyers

remains robust, DMO head Sir Robert Stheeman told MNI.

     The Treasury, battling to cushion the impact of Covid-19, has set the DMO

the task of raising GBP225 billion, around 11% of GDP, from April to July, and

it has responded by increasing the relative share of shorter-dated, conventional

gilts while paring back inflation-linked issuance. Stheeman said in an interview

that there was no fixed target for reducing linkers and that the DMO could

continue with heavy issuance in August if needs be.

     "One inevitable consequence of the Treasury asking us to raise GBP225

billion in four months is that we have had to increase short-dated issuance in

relative terms. But traditionally those shorter parts of the curve are also the

most attractive segment of the market to many international investors including

overseas official institutions such as central banks and sovereign wealth

funds," Stheeman said.

     "I would not be surprised to see demand from that type of investor, and

from that part of the investor base, being quite robust during this period," he

said.

     --STRONG DEMAND

     There were signs of intense gilt market stress in the days before the Bank

of England announced a fresh GBP200 billion of asset purchases following a

special meeting on March 19, with investors moving into cash, primarily the

dollar, hitting sterling. Since then the gilt market has stabilised, with strong

demand at all DMO auctions.

     The BOE has shied away from purchasing inflation-linked gilts but Stheeman

is adamant that the DMO's auction programme, set out in more detail Thursday,

reflects primary market demand and not the Bank's activity.

     "In designing our issuance programme .. we are not trying reflect in any

way what the Bank is purchasing through its APF (Asset Purchase Facility)

programme. We are trying to design a programme that we think will work most

efficiently in the primary market," Stheeman said.

     While the Bank has stuck to the secondary market, with Monetary Policy

Committee member Gertjan Vlieghe saying recently that "We .. have no plans or

intentions to buy in the primary market," its presence in the conventional gilt

market could in turn influence the primary demand that the DMO is responding to.

     --LINKERS

     Stheeman is acutely aware that the big UK pension funds, in particular,

rely heavily on longer-dated inflation-linked gilts for risk management purposes

and the DMO will have to meet this demand down the line, but for now size

matters in auctions.

     "It is absolutely true that we do not have a fixed target for linker

issuance .. For linkers, as with conventionals, shorter-dated auctions will tend

to be larger than longer dated, simply to take into account the amount of

duration risk that we are asking the market to absorb in any one operation, and

that will remain the case," Stheeman said.

     The Treasury's approach to Covid-19 has been to front-load funding as it

tries to get fiscal support out rapidly, and debt-raising plans have only been

fixed until August rather than for the fiscal year, in the hope that the pace of

gilt issuance will slow markedly in the latter part of the year.

     Stheeman, however, says that the idea the gilt market is quiescent in

August is a myth and they stand ready to keep up a high pace of issuance if

things do not unfold as planned.

     "You do not see the dearth of issuance in August that might have occurred

15 years or so ago. If we need to increase issuance in August and, I repeat, I

do not know if that is going to be the case, I have no doubt that we could do so

in a way that would not make it particularly difficult for the market to

absorb," he said.

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

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