LONDON – A mammoth cut to Britain’s plans to issue government debt was structured to minimise market disruption as far as possible and maintain a steady supply of bonds to investors, the head of the country’s debt agency told Reuters on Wednesday.
Gilt prices shot higher after the Debt Management Office said it planned to issue 194.8 billion pounds of bonds in the current 2021/22 financial year, 57.8 billion pounds less than its previous remit.
A Reuters poll of primary dealers of gilts had pointed to a far smaller reduction of 33.8 billion pounds.
Both 10-year and 30-year British government bonds recorded their biggest one-day price rises since March 2020, when prices surged after the Bank of England restarted its quantitative easing programme during Britain’s plunge into a COVID-19 lockdown.
The cut in bond issuance reflected new budget forecasts from Britain’s fiscal watchdog, which slashed its estimate of the government’s financing needs, thanks to a faster-than-expected economic recovery and borrowing that has undershot forecasts so far this year.
“We are trying to manage what is an unprecedentedly large reduction in a way which we think causes the least amount of disruption to the market as possible,” DMO Chief Executive Robert Stheeman told Reuters.
Stheeman, who has headed the DMO since 2003, presides over the government’s debt sales strategy for a market now worth more than 2 trillion pounds.
Gilt prices rose sharply as finance minister Rishi Sunak outlined new forecasts showing far less government borrowing in future years than forecast in March, and hit their day’s high after the DMO announcement.
The DMO will now hold less than half the number of bond auctions it had planned between November and March, with the number of long-dated bond auctions reduced to four from 11.
The DMO sought to limit the impact on the bond market by cutting planned issuance of short-term Treasury bills by 25 billion pounds – again a far larger reduction than primary dealers of gilts had assumed.
“For gilt market participants, who place a lot of emphasis on regularity of supply, we wanted to make sure that we could do what we can soften the scale and impact of the adjustments,” Stheeman said. “Hence the decision to take a significant portion of that – 25 billion pounds – off our T-bill programme for debt management purposes.”
Stheeman said he thought the gilt market was functioning smoothly.
“We want to make sure that continues. We know liquidity has been reasonably good, market functioning generally has been good,” he said.
“In as much as we can within the constraints of our mandate, we want to try and help ensure make sure that this reduction doesn’t cause a problem for the market,” Stheeman added.