“Considering the challenges that the gilt market faced last year, the speed with which conditions have returned to normal and the extent to which the market has stabilised I think is notable,” Stheeman said. — Reuters
LONDON: Demand for British government bonds has recovered from the damage dealt by the market turmoil which followed then Prime Minister Liz Truss’ mini-budget last year, says the chief executive of the UK Debt Management Office (DMO).
Robert Stheeman, who is responsible for selling £237bil (US$295bil) of British gilts to investors this financial year, said he had been impressed by the rapid rebound.
“Considering the challenges that the gilt market faced last year, the speed with which conditions have returned to normal and the extent to which the market has stabilised I think is notable,” he said.
The recovery included renewed appetite from foreign investors, he told Reuters after a mid-year update on the DMO’s issuance plans.
“I talked about how quickly things return to normal and that definitely includes international interest,” Stheeman said.
In September 2022, the Bank of England (BoE) was forced to intervene in the bond market – buying £19bil of long-dated and inflation-linked gilts – after record price falls in response to Truss’ budget plans put some pension funds at risk of collapse.
Since then, Prime Minister Rishi Sunak has put Britain’s finances on a more orthodox course.
Britain no longer pays a big risk premium for its borrowing, but outright interest rates are still high, reflecting a global rise in central bank rates.
Just a month ago, 30-year gilt yields reached their highest since 1998 at 5.209%.However yields have fallen in the past month, as investors judge central banks, including the BoE, will cut rates in 2024.
The DMO announced minimal changes to its plans on Wednesday, lowering gilt issuance by just £500mil to £237.3bil, wrong-footing some investors.
A Reuters poll had pointed to a £15bil reduction. Instead, the DMO used lower borrowing needs created by strong tax revenues to reduce net issuance of short-dated Treasury bills by £10bil.
Before the pandemic, the DMO regularly used changes in T-bill issuance to smooth out small changes in borrowing needs, and Stheeman said the decision represented a return to that.
Stheeman said the DMO’s debt issuance plans had not been influenced by the BoE’s quantitative tightening.
In September, the BoE said it would reduce its gilt holdings by £100bil over the next 12 months, after an £80bil reduction during the previous 12.
“Categorically it has not affected our decisions or our strategies,” Stheeman said.
Some investors have said BoE sales of long-dated gilts were having an outsize impact on that part of the market, which is typically less liquid. — Reuters
