By Andy Bruce
LONDON (Reuters) – Britain’s government bond market should be able to handle easily a newly announced, unprecedented slew of sales planned for the next three months, the head of the country’s Debt Management Office (DMO) said on Thursday.
The debt agency had announced earlier that it would issue 180 billion pounds ($222 billion) of bonds in May, June and July, more than it had recently pencilled in for the entire 2020/21 fiscal year, as it rushes to fund a surge in public spending to soften the impact of the coronavirus pandemic.
DMO Chief Executive Robert Stheeman told Reuters he was “genuinely confident” the market would snap up the glut of government bonds, known as gilts.
“Please do not think that I take that for granted or that we’re complacent in any way. It is an unprecedented amount,” Stheeman said. “But at the same time, the market really has proven remarkably resilient. And I think that it will cope with this and take it in its stride.”
With the pandemic expected to trigger the biggest fall in economic output in three centuries, the government has taken a string of unprecedented measures to avert a total collapse, including a pledge to pay 80% of the wages of workers who are temporarily laid off.
British government bond yields, which are close to all-time lows, rose only slightly after the extra issuance was announced — a sign that investors were not spooked by the details of the surge in debt issuance.
Stheeman said the market was now functioning pretty well given the economic backdrop and the fact that many investors have had to adapt to working outside of their offices.
“There was a period, perhaps about four or five weeks ago, just before the Bank of England stepped in with its announcement of QE, where the market did not feel particularly stable,” he said. “It has since stabilised – and I think some of the credit needs to go to the Bank for this.”
Before the BoE announced a record 200 billion pounds of quantitative easing asset purchases, mostly gilts, last month, British government bond prices had been on course for their sharpest fall since the 1998 emerging market debt crisis.
Stheeman said the Bank had no involvement in producing the DMO’s latest remit, announced on Thursday, despite its ever-growing presence in the secondary market.
WAYS AND MEANS
Earlier this month the government reactivated an overdraft facility with the central bank that will allow it to borrow potentially billions of pounds directly from the BoE if it has trouble selling record amounts of debt on financial markets.
Both BoE and Treasury officials have been keen to stress the measure — known as the ‘Ways and Means’ account — is intended solely to manage the government’s cashflow and is not a backdoor to monetary financing of the government.
“It is definitely only going to be used as a very short term cash management tool, if necessary — and I stress if necessary,” Stheeman said.
“It is not designed in any way to be a financing tool for government. It is purely designed to be a cash management tool.”
He said he would be surprised if it were to be used if investors failed to buy all the gilts on offer at a single auction, as usually this would be addressed by the DMO’s normal cash management operations.
Stheeman, who has been in charge of the DMO since 2003, helped to steer the gilt market through the global financial crisis that began in 2007 as the government issued huge volumes of debt.
Asked how the coronavirus crisis compared, Stheeman said: “Each time you think you think you’ve seen it all, the market tends to tell you that you haven’t.”
“None of us has experienced anything like it. Having said that, the market has developed while I’ve been at the DMO, it’s hugely different,” he added.
“It’s vastly more liquid. It is much more deep, it’s more mainstream. It is capable of absorbing this sort of supply in a way that would have been unthinkable 17 or 18 years ago when I joined the DMO.”
(Reporting by Andy Bruce; Editing by Catherine Evans)