UK faces record net bond sales, warns nation’s debt chief
THE UK’s net bond sales are set to be the highest in history for the coming fiscal year, according to the nation’s debt chief.
The view from Robert Stheeman is in line with forecasts by bank strategists, who worry the jump in supply could renew the pressure on gilts seen in recent weeks. Stheeman, the chief executive of the Debt Management Office, was speaking to Parliament’s treasury committee after last month’s mini-budget sparked turmoil across markets.
With the government having since backtracked on plans for borrowing-fuelled tax cuts, the risk premium on UK bonds has now largely reversed and market confidence has improved, Stheeman said. Still, the environment remains challenging and it’s important the UK bond market is not viewed as an outlier, he said.
“The market is clearly volatile, it’s stressed, and I don’t think we should pretend otherwise,” he told lawmakers, adding that had been sparked by UK specific factors. “We do not want to be that little wildebeest who strays too far away from the herd, but if we can get back into the herd, and if we can be viewed as anything but an outlier, that is obviously important.”
The Bank of England (BOE) was forced to step in to calm markets after the yield on long-maturity gilts soared nearly 140 basis points in a matter of days. At the centre of the maelstrom were pension funds, forced to sell gilts and other assets to meet margin calls.
The meltdown showed that pension funds’ risk-management strategies were not adequate, Stheeman said. The extent of the margin calls that some liability-driven investment funds faced was unexpected because they did not anticipate the scale of movements in gilts, he added.
The central bank’s plans to actively sell gilts risks adding to the turbulence, Stheeman said. The record net bond sales will reflect increased government borrowing after redemptions and BOE selling is taken into account.
Bond traders will have to wait until Nov 17 to get further details on the government’s plans for borrowing. Chancellor of the Exchequer Jeremy Hunt is seeking to fill a fiscal shortfall of £35 billion (S$57 billion), according to people familiar with the matter. BLOOMBERG
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