MNI INTERVIEW: UK Long-End Gilt Market Functioning Better- DMO

Market functioning at the longer-end of the Gilt curve has improved considerably in recent months, though is still not optimal, the UK government's senior debt manager told MNI Wednesday.

The latest gilt remit published following Wednesday’s budget reduced the share of longer-dated bonds, in line with a fall in investor demand at that point of the curve, said Robert Stheeman, head of the Debt Management Office.

“I would describe it (functioning) as considerably better… probably not yet completely optimal, but conditions have returned to much more like what we have seen previously in terms of market functioning. Are they optimal? … Probably not," Stheeman said in an interview

There has been a structural shift away from longer-dated gilts for some time as pension fund liabilities have changed, and is not just a "reflection of concern" over market functioning, he said.

"The duration of the pension industry's own liabilities is simply not as long as it once was. There has been a structural shift there. There is still demand – I don’t want to leave you with a false impression ... maybe just not on the scale we were used to 10 years ago," Stheeman said.

"The really heavy skew towards longs that we saw some years ago is now skewed somewhat lower. It just reflects underlying investment trends,” he said, "We are still issuing more longer debt than any other borrower in the world and we will continue to do so I imagine for some time.”

INFLATION PROTECTION

Sales of index-linked gilts are set to increase in nominal terms in 2023/24 according to the latest remit, although their share of overall issuance will fall from 15% to around 11% in line with investor demand, Stheeman said, though he said this did not necessarily reflect less of a desire for inflation protection.

“At the time of the consulations, there was feedback about being somewhat cautious about how much we should issue in linkers and several people specifically said do not focus on the percentages …. Nearly all the advice we receive on issuance splits usually comes in percentage terms but the advice we got at that meeting on linkers tended to be in absolute terms,” he said.

But, he added: "I don’t see a fundamental decline in the need for inflation protection. Of course, these things are always relative. But there is a need for inflation protection and events of last year show of course there is a need. Its just not unlimited.”

REMIT, APF SALES IN TANDEM

Despite the increase in gilt sales expected in the coming financial year, Stheeman had no concerns over competing with the Bank of England's gradual unwind of its GBP830 billion Asset Purchase Facility. (See MNI INTERVIEW: Gilt Sales Target Short-End Liquidity: DMO)

"So far no issues, we are working in tandem. It been okay so far, we haven’t clashed," he said.

" The Bank and ourselves have tried to choreograph our operations to help the market. But it is busy for the market. There are virtually no days now that there isn’t an operation, supply from either us or the Bank, but that doesn’t mean these things aren’t carefully planned, they are."