U.K. Increases Borrowing by 110 Billion Pounds to Fund Recovery

(Bloomberg) -- Britain’s debt agency ramped up its record bond-issuance plans to help the government battle the fallout of the coronavirus pandemic, but said uncertainty over the recovery means anticipating future funding needs is a challenge.

The Debt Management Office plans to sell an additional 110 billion pounds ($138 billion) of bonds between September and November, bringing total sale plans from the start of the fiscal year to 385 billion pounds. That’s equivalent to about 18% of gross domestic product at the end of 2019.

“To try and anticipate such external developments -- whether there’s a quick recovery, or second wave or whatever it is -- is extremely difficult,” DMO Chief Executive Officer Robert Stheeman said in an interview. “I can’t predict markets, how am I going to predict what’s going to happen with a second wave?”

Gilts were among the biggest gainers in developed market sovereign bonds on Thursday.

The increase in the DMO’s debt-sale plan, which was just below the 115 billion pounds estimated in a Bloomberg survey of primary dealers, is the latest sign of the strain being placed on Britain’s public finances as a result of the virus. The Office for Budget Responsibility predicts that the budget deficit could swell up to 21% of output this year.

Even before the announcement, the nation’s debt-sale plan in the fiscal year through August beat the record set during the global financial crisis. Still, the Bank of England is helping to keep borrowing costs close to record lows thanks to interest rates at 0.1% and its quantitative-easing program.

The BOE will buy just over half of the supply, leaving investors to digest around 14 billion pounds of gilts per month, according to John Wraith, head of U.K. and European rates strategy at UBS Group AG. The DMO’s Stheeman said demand for U.K. bonds has been strong, with a recent syndicated sale for bonds due 2050 receiving orders from a record number of investors.

Gilts Rise

“When you add in expectations the BOE will do more if necessary, and safe haven demand from risk averse private investors, it is likely to keep yields anchored for the time being at least,” Wraith said.

The U.K. will hold 38 gilt auctions between September and November, as well as at least two syndications, and will decide on what maturities to sell after a consultation with investors on July 27. The DMO isn’t ruling out the possibility of issuing green bonds, Stheeman said.

Primary dealers see the government issuing about 450 billion pounds of bonds during the 12 month period, nearly double the record set during the financial crisis.

The yield on 10-year gilts fell four basis points to 0.123%, the lowest level since a record low set on March 9 amid the height of market fear over the coronavirus outbreak.

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