U.K. Cuts Gilt Sales for New Fiscal Year to Least Since 2007-08

(Bloomberg) -- The U.K. plans to reduce its gilt issuance to the lowest in more than a decade as the nation’s public finances strengthen.

Gilts held their gains as the Debt Management Office said it plans to sell 102.9 billion pounds ($144 billion) worth of gilts in the fiscal year starting April. While that is the lowest issuance since the 12 months ended March 2008, it was higher than the median forecast of 98.2 billion pounds in a Bloomberg survey of nine primary dealers.

U.K. Cuts Gilt Sales for New Fiscal Year to Least Since 2007-08

The yield on two-year gilts was steady at 0.835 percent, while the rate on 10-year notes fell two basis points to 1.48 percent as of 2:04 p.m. in London. Those on their 30-year counterparts dropped four basis points to 1.89 percent.

“The gilt market got the fall in supply that it was looking for, and gilts have been strong in response,” Daniela Russell, head of U.K. rates strategist at HSBC Holdings Plc, said. “The long end has outperformed though, which makes sense because the number of syndications has been reduced from five to four, which suggests less duration is coming to the market.”

The debt office will reduce the number of syndications, typically used to issue longer-dated and inflation-linked securities, from five to four. Inflation-linked debt will also make up a smaller proportion of issuance, helping to boost real yields, Russell said.

Gilt maturity

Total amount inc. syndications

Proportion 2018/19

Proportion 2017/18

Short-datedGBP24.9b24.2%25.4%
Medium-datedGBP20.3b19.7%20%
Long-datedGBP29.4b28.5%29%
Index-linkedGBP21.7b21.1%24.2%

Here is a compilation of other analyst views to the Spring Statement and the DMO’s remit:

UBS

  • The reduced issuance doesn’t alter the bigger picture, says head of macro rates strategy John Wraith
    • Had forecast DMO to cut issuance to GBP98.2b, so “marginally disappointing,” but “given there were no big policy changes, and this was little more than an update of existing forecasts that themselves were pretty recent, it’s not a game changer”
  • For now, DMO release just maintains the status quo -- decent drop in supply next year, but more due to low redemptions than improvement in underlying public finances
    • “The bigger problems regarding productivity weakness and of course Brexit risks are as serious as ever, they haven’t changed one way or the other as a result of today”

Societe Generale

  • “The initial bounce in gilts was a combination of U.S. news and the fact that Hammond was quite bullish in presenting his public sector net borrowing numbers,” says Jason Simpson, a fixed-income strategist
  • “The drop to GBP102.9b is decent and actually below what I had suggested, but given there were forecasts for GBP90b it is clearly not enough to get the market moving”

NatWest Markets

  • The headline gilt issuance number was higher than GBP94.8b that NatWest had forecast, “but most importantly for markets, we do have only two index-linked syndications,” says Simon Peck, a strategist
    • This means a 3.1 percentage point decline in index-linked supply
  • “So overall, though slightly higher than our estimate, conclusion remains the same -- good for long conventionals and long breakevens”

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