MNI INTERVIEW: UK Linker Sales At Comfortable Level-DMO Chief

The UK’s move to rein in issuance of index-linked gilts has taken its sales to more comfortable levels in terms of the longer-term trajectory of its inflation portfolio, capping the government’s exposure at a time when consumer prices are surging, Debt Management Office head Robert Stheeman told MNI.

Index-linked gilts will account for 14.9% of issuance in the 2022-23 fiscal year, up from 13.5% this year but well below the levels of over 20% normal in recent times, according to the DMO’s new issuance remit, unveiled on Wednesday alongside the government’s Spring Statement mini-budget.

While the proportion of issuance made up by linkers is still high by international standards, Stheeman said in an interview that the DMO must consider the risk for the government finances in its plans.

"Even at times of very low inflation demand for the product has always been very strong, it is very structural. That structural demand has not fundamentally changed." he said.

Institutional investors are regular customers at the long end of the curve, and demand also picks up at the short end during times of high inflation, he added.

The government said in 2018 that it planned to reduce linker issuance over the medium term following projections from the Office for Budget Responsibility that exposure to inflation risk could rise in an unconstrained manner.

"At that time, annual index-linked issuance was over 20% of the gilt sales programme. This year we plan to be down to just below 15%. In terms of the longer-term trajectory of inflation risk on the debt portfolio, that is a much more comfortable level,” the DMO chief said.

COORDINATION WITH BOE

Stheeman said investors should accept at face value reassurances from the Bank of England that it will seek to avoid market disruption when it begins selling its APF gilt portfolio, something which could happen after Bank Rate, currently at 0.75%, hits 1%.

"The Bank itself has on numerous occasions gone out of its way to try and offer reassurance to the market that it will coordinate any sales that it might choose to make ... with us,” he said. “They have said it is their intention to minimise interference with our issuance programme. I don't see why the whole market should take that statement at other than face value.”

Following the publication of the new remit, “our financing programme is a given, a known quantity in the market,” he noted.

Demand for T-bills may rise as the BOE squeezes central bank reserves, as they can be used as a substitute by risk managers. Stheeman highlighted how the stock of short-term debt will rise by GB23.2 billion in the year to March 2023.

"That increase is us rebuilding the stock following an exceptionally large reduction that we had to make in October last year," Stheeman said.

"For debt financing purposes, with today’s announcement there will be approximately GBP60 billion worth of debt financing T-bills in issue at the end of March 2023," he said.