By David Milliken
LONDON (Reuters) – Britain currently sees somewhat less value in issuing long-dated gilts compared to short or medium-dated bonds as it seeks to fund its second-highest borrowing needs on record, the head of the country’s debt agency said.
Earlier on Wednesday, the United Kingdom Debt Management Office announced it would issue 265 billion pounds ($338 billion) of government bonds in the 2024/25 financial year, up from 232 billion pounds in the current year which ends this month.
That will be the second-highest issuance on record in cash terms, second only to the 486 billion pounds issued in 2020/21 to fund the government’s response to the COVID-19 pandemic.
“This is again a substantial remit,” DMO chief executive Robert Stheeman told Reuters. “We have tried to design a remit that maximises the chance for a smooth delivery.”
The new remit follows finance minister Jeremy Hunt’s annual budget plans, under which public debt is on course to rise from 2.4 trillion pounds to 3.0 trillion by 2028/29.
And unlike during the pandemic, the DMO now has competition of a sort from the Bank of England, which is selling 100 billion pounds of gilts a year from its portfolio of bonds which peaked at nearly 900 billion pounds as a result of quantitative easing between 2009 and 2021.
Historically long-dated bonds – those with a maturity of more than 15 years – have been a mainstay of British government debt issuance.
Britain’s government bonds have the longest average maturity of any major country, at an average of 15 years at the end of 2022, up from less than 13 years in 2005, according to DMO data.
But the upcoming issuance programme has the lowest percentage allocation of long-dated bonds in the DMO’s history at 18.5% of issuance, down from 22.3% this financial year, although it is a hefty 49 billion pounds in absolute terms.
“There’s a lot of discussion around a gradual but perceptible decline in demand at the long and very long end of the market. We have taken that into account,” Stheeman said.
“It may be observed that there is a strong direct correlation between where demand is focused and where value for money is,” he added.
SHIFTING DEMAND
In January, bond dealers and investors told the DMO there had been a “significant structural change” that had lowered demand for long-dated gilts, partly due to turmoil that affected pension funds during Liz Truss’ short-lived premiership in 2022.
Stheeman said the decline in demand was long term and gradual, reflecting the shrinking role of defined benefit pension funds which are required to hold long-dated assets including gilts to match their liabilities.
Other factors also favoured issuing short and medium-dated debt, said Stheeman, who has headed the DMO since 2003 and is due to retire in June.
Shorter gilt maturities have a broader investor base – making them easier to sell in the large volumes now needed – and the gilt yield curve had steepened since July, increasing the relative cost of issuing longer-dated debt.
Benchmark 30-year gilts currently yield 4.45%, half a percentage point more than five-year gilts, in contrast to July when yields on 30-year gilts were 0.2 percentage points lower than those of five-year bonds.
“It’s a noticeable trend that would potentially suggest that the demand dynamic might be changing,” Stheeman said.
($1 = 0.7849 pounds)
(Reporting by David Milliken; graphic by Sumanta Sen, Editing by William Maclean)
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