RPT-MNI INTERVIEW: Investor Demand Behind Long-End Gilts- DMO
(Adjusts issuance data in second paragraph)
Increases to the UK’s issuance plans to fund the government’s 2024-25 budget were influenced by investor appetite for longer-term debt, Debt Management Office CEO Jessica Pulay told MNI on Wednesday.
The DMO said it planned to sell around GBP300 billion of gilts in 2024/25, roughly GBP20 billion higher than published at the time of the April remit, following Chancellor of the Exchequer Rachel Reeves' budget statement, although Pulay said the new total was "broadly in line” with market expectations.
"We judged there was marginally more scope for increasing the longs relative to the shorts and mediums," Pulay said, noting the April remit had a comparatively large allocation towards short- and medium-dated gilts.” She also pointed to solid investor demand in that sector in both conventional and syndicated auctions.
“Taking into account the gilt market’s very strong track record, I would say, in adjusting to changes in supply, we expect that this remit revision will be absorbed smoothly by the market. The modest increase to an already large financing programme will obviously require gilt issuance to be diversified across all maturities and types of gilt,” she said.
The DMO said it hadn't added any new auctions despite the increased scale of sales, but had adjusted the programme, with a medium-term syndicated deal now expected. Although no exact maturity has been chosen, a 10-year sale would appear likely, as the last DMO 15-year issue sits just outside the medium bucket and is not of benchmark size.
“We're not changing the total number of auctions. We have planned a total of 77 auctions this financial year. What we are doing to accommodate the Remit revision is we are replacing one medium auction for a long auction, and we are also adding one medium syndication,“ Pulay noted.
“And I think what is really important to note is that we take feedback regularly from the market about the choices of maturities and types of gilts to issue,” Pulay said when asked for guidance as where in the curve the sales could come.
"We will hear market preferences as to the specific maturities that they are looking for us to issue within the long maturity bucket in the final quarter of 2024-25,” she said.
Long-end syndications to date, "on the whole, been within the 15- to 30- year maturity range, but that doesn't exclude a longer operation going forward, subject to demand and market conditions.”
INDEX LINKED SALES
There was a modest increase in the total of index-linked gilt sales in the amended remit, with auctions still seen as well absorbed, despite the sharp fall in inflation over the previous 12 to 18 months.
“We've seen very robust demand for our linker operations over the course of the year. Performance metrics such as cover ratios at index-linked auctions provide assurance that they continue to be well absorbed by the market. Recent index-linked gilt auctions have been well over three times covered," she said, noting total index-linked gilt issuance now planned in 2024-25 was £33.4 billion
In recent years, the DMO has believed the saturation spot for index-linked demand was somewhere between GBP30 and GBP35 billion.
GREEN GILTS
The DMO did not increase green gilt issuance in the wake of the budget, but said sales in the category had been "going very smoothly” this year.
Green gilts have been fully integrated into the DMO's standard gilt program "and we continue to auction green gilts on a regular basis,” Pulay said.
“There's no change to planned green gilt sales in the balance of this financial year. The planning assumption is that we will raise GBP10 billion via green gilt issuance. Proceeds from green gilt operations amounted to GBP5.7 billion so far this financial year, so there are further sales planned."
Looking forward, the DMO will determine green gilt issuance for following years, "as we always do at the beginning of each financial year,” she added.