MNI MARKET ANALYSIS: UK Gilt Remit Can Be Revised Post-Brexit

--UK Treasury Can Amend DMO Programme If Increased Borrowing Required

By David Robinson and Tim Davis

     LONDON (MNI) - The UK Debt Management Office's 2019-20 gilt remit could be

rapidly revised higher in the event of a no deal Brexit, irrespective of whether

there is a new Budget, MNI understands. The Treasury has the power to revise the

Debt Management Office's remit "in light of exceptional circumstances" and has

previously deployed this right -- back in 2000 and 2008.

     With reports Prime Minister Boris Johnson favours an emergency Budget ahead

of the October 31 Brexit deadline, the Office for Budget Responsibility, the

official fiscal forecaster, could hamstrung as by law it can only make a

single-point forecast based on government policy -- which currently both seeks

and expects a withdrawal agreement with the European Union -- and not a range of

outlooks.

     An OBR pre-Brexit forecast could substantially underestimate likely

borrowing, but HM Treasury could boost the remit post-Brexit, if needed.

     Gilt issuance is normally determined by the central government net cash

requirement (CGNCR), derived from the OBR's fiscal forecasts, but the Treasury

could revise the DMO's remit by changing the net financing requirement without

concurrently altering the CGNCR projection. This happened in both June 2000 and

October 2008.

     --PRECEDENT

     In Autumn 2008, the Treasury revised the DMO's 2008-09 financing remit to

raise an extra Stg37 billion to facilitate bank recapitalisation, with planned

gilt sales upped by Stg30 billion to Stg110 billion and T-bill issuance upped by

Stg7 billion, without publishing new fiscal forecasts.

     The gross financing update was increased by Stg 55 billion and the gilt

remit revised up another Stg 36.4 billion at the time of the Pre-Budget Report

(the former "mini-Budget" statement and forecasting round, usually held in

November).

     The only other recent example of the DMO changing the financing remit

without a CGNCR forecast change was in June 2000, following a very successful 3G

mobile phone spectrum auction.

     The bank recapitalisation had a predefined cost and the 3G auction had a

realised immediate one-off increase in revenue. However, although the OBR may be

able to cost some one-off policies announced in an emergency budget, without a

no deal Brexit scenario it could not make estimates of any falls in tax revenue

potentially associated with any economic slowdown.

     --DMO OPTIONS

     In recent years the DMO has preferred to adjust the stock of T-bills before

amending the gilt remit to keep gilt issuance as predictable as possible. In the

absence of any new CGNCR forecasts the DMO could increase T-bill issuance to

create a "contingency fund" in the event of a no deal Brexit to keep the

government's cash position ticking over until new forecasts are produced. There

is also a chance that the Treasury could launch new NS&I retail products,

further reducing the requirement to increase gilt issuance.

     If there is an increase in the remit, two factors point to increased

short-dated issuance. First, the DMO is ahead of schedule, having already raised

over 50% of its intended sector target, having held five out of its ten

scheduled auctions for 2019/20, with another due in September. With no remit or

calendar revision, this would leave two short-dated gilt auctions scheduled for

both the third and fourth fiscal quarters of 2019/20, although there appears

scope to hold one auction per month if needed. This could easily provide another

Stg 6 billion (or more if auction sizes were increased). The second reason is

that by looking at the DMO's redemption schedule, relative to earlier years,

there is a clear drop-off in redemptions due in the 2025/26 fiscal year when the

on-the-run 0.625% Jun-2025 gilt is due to mature.

     Very large increases in the financing requirement are likely to need

increased sales of medium and long-dated conventional gilts too. With Robert

Stheeman stating in the past that the DMO is reducing linker issuance as a

proportion of gilt issuance, and with inflation potentially higher in a no deal

scenario given the depreciation of sterling, a skew towards more conventional

issuance than index-linked is likely.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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