By Andy Bruce
LONDON (Reuters) – Britain is likely to sell nearly 250 billion pounds ($347 billion) of government bonds in the coming financial year – the second-highest total on record – to help power an economic recovery from the COVID-19 pandemic, a Reuters poll of dealers showed on Tuesday.
The survey of all 15 wholesale primary dealers, or banks tasked by the government with creating a market for its bonds, pointed to gilt issuance of about 247.2 billion pounds for the 2021/22 financial year starting in April.
Such a sum marks a sharp drop from the 485.5 billion pounds of gilts that the United Kingdom Debt Management Office (DMO) plans to issue in the current 2020/21 year to finance the economic response to the COVID-19 pandemic.
Finance minister Rishi Sunak is due to deliver his budget around 1230 GMT on Wednesday, after which the DMO will publish its 2021/22 gilt issuance remit.
Sunak has said he would not rush to fix the public finances as he readies a budget, which will add more borrowing to almost 300 billion pounds ($418 billion) of COVID-19 spending and tax cuts.
In November, the Office for Budget Responsibility (OBR) forecast borrowing in 2020/21 would reach 393.5 billion pounds, or 19% of GDP, a peacetime record. The latest official data suggests borrowing will fall below this, partly because more taxpayers than expected have opted against deferring payments to 2021/22.
The poll showed Sunak is expected to announce a budget deficit forecast for 2021/22 of 180 billion pounds, 16 billion pounds more than the OBR had predicted in November.
“Our current estimate is that the latest lockdown will ‘cost’ around 16 billion pounds in terms of additional fiscal support,” said RBC economist Cathal Kennedy.
He cited the fact that more workers are now furloughed than the OBR had assumed in November, as well as expanded support for self-employed people and business grants announced in January.
In addition to the budget deficit, the government must also refinance 79.3 billion pounds of gilts due to mature in 2021/22.
As in the current year, much of the issuance will be soaked up by the Bank of England’s asset-purchase programme, which is due to buy around 100 billion pounds of government debt during the next financial year.
The poll suggested the government will finance borrowing almost entirely through gilts in the next financial year, rather than additional issuance of T-bills or via the government’s retail investment arm.
The DMO is likely to ramp up its issuance of inflation-linked gilts in 2021/22 to around 14% of the total, compared with 7% in the current financial year, the poll showed.
The DMO reined in sales of index-linked gilts through most of 2020 due to uncertainty caused by a review into the future of the retail prices index measure of inflation, which is used to price the bonds.
“Given pent-up demand, we think that this target is achievable,” said Deutsche Bank analysts Sanjay Raja and Panos Giannopoulos.
The dealers did not expect much change in the split between short, medium and long-dated gilts. Britain already has a longer average maturity for its debt than any other major economy, but the recent jump in global bond yields has prompted some commentators to say the DMO should do more to lock in low rates.
The government has also said it will issue the first “green gilts” – bonds to finance environmentally friendly projects – in 2021/22. Most respondents expect one or two bonds to be issued, of around 10 billion pounds in total.
(Reporting by Andy Bruce, editing by Larry King)
