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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
     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.
     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:
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