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--Stheeman Still Envisages Ultra-Long Issuance, But To Lesser Extent
--Defined Benefit Schemes' Demise Very Gradually Transforming UK Gilt Market
By David Robinson
     LONDON (MNI) - The winding down of defined-benefit pension schemes has
shifted funds towards shorter-dated U.K. Treasury bonds, and will ultimately
reduce demand for longer maturity and inflation-linked gilts, Debt Management
Office Chief Executive Robert Stheeman told MNI.
     While Stheeman stressed in an interview that defined-benefit schemes remain
a major force at the long end of the market, many are now closed to new
entrants, coinciding with a gradual shift in the point of strongest marginal
demand on the yield curve from the 30- to 40-year segment towards 30 years and
"maybe even into the 20- to 30-year area."
     "That is something that we have noted in particular over the past 12 to 18
months," said the DMO head, speaking to MNI at the Euromoney Bond Investors
Forum last week and in a subsequent email exchange.
     "DB pension schemes are massive, long-dated and by their nature have
liabilities that are under-hedged and still growing despite the declining number
of new entrants to schemes," Stheeman said. "In the very long term, the shift
from defined benefit to defined contribution schemes will decrease the demand
for long dated bonds and linkers.
     "However, this transition is a bit like turning a supertanker travelling at
     The yield curve actually dips beyond the 30-year point, which "tells you
where the domestic demand is," Stheeman said, with 30-year plus yields close to
all-time lows.
     Stheeman is in favour of curbing the growth of inflation-linked issuance to
reduce the UK's vulnerability to an inflation shock.
     The UK is an outlier internationally, with just over 26% of its debt
portfolio inflation linked, around double the next closest country, Italy, and
compared to 9-10% in the U.S. With the possibility of further sterling weakness
due to Brexit, upside UK inflation risks are all too real.
     "As part of the government's responsible approach to fiscal risk
management, we are looking to reduce the proportion of index-linked gilt
issuance as a share of total issuance over the medium term," he said.
     The DMO's planned reduction in inflation-linked issuance in the 2019-20
fiscal year is around 2 percentage points but Stheeman said that "we don't have
a target" for the pace of reduction going forwards.
     The latest official data has shown some softening in institutional gilt
demand. Insurance companies, pension funds and trusts in the fourth quarter
reported net disinvestment of stg0.4 billion in gilts in the fourth quarter 2018
compared to a five-year quarterly average net investment average of stg4
     The challenge for the DMO is to avoid failing to meet demand while also
tackling inflation exposure.
     "We need to be mindful of striking a balance between exposure to inflation,
achieving value for money, predictability and efficient market function. We will
therefore try to remain flexible in order to give us the ability to react to
changes in rates and market conditions as they arise," Stheeman said.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$,M$$FI$,MGB$$$]