LONDON: Britain's Debt Management Office cut its bond issuance plans for the rest of the financial year by a bigger-than-expected 8.5 billion pounds ($10.9 billion) on Monday, after finance minister Philip Hammond reported a fall in borrowing needs.
Dealers polled by Reuters last week had expected to see a 5 billion pound cut to the gilt issuance remit. The total gilt issuance remit for 2018/19 now stands at 97.5 billion pounds.
The DMO will not cancel any auctions outright and instead will reduce average auction sizes by around 400 million pounds each, split fairly evenly between different maturities and index-linked gilts.
"There's been no fundamental change either in the market environment or the demand landscape since the Spring Statement, so there was no need for us to fundamentally alter the balance between the different categories," DMO chief executive Robert Stheeman told Reuters.
The DMO was sticking with its goal of slowly reducing the proportion of new issuance that is inflation-linked, in response to concerns from government auditors that this debt might prove costly if inflation spikes in future.
Gilt market reaction to Hammond's announcement of lower borrowing this year was muted, in part because the forecast fall in borrowing in future years is more modest.
The effect on gilt issuance was also limited by the DMO's decision to reduce treasury bill issuance this fiscal year by 4 billion pounds. Primary dealers polled by Reuters had expected no change.
Britain has so far sold 64.7 billion pounds of the 97.5 billion pounds of gilts it intends to sell during the current financial year, which ends just a couple of days after the country leaves the European Union on March 29, 2019.
The DMO forecasts that gilt issuance will jump to 132.7 during the next financial year, driven by some 99.1 billion pounds of maturing debt which will need to be refinanced.
Stheeman said that so far Brexit "does not seem to have had a discernible impact on gilt yields", which had risen this year in tandem with rising global government borrowing costs until recent equity market turmoil sent bond yields back down.
"When there is a lot of political noise it tends to be the currency market, sterling itself, where you see a market movement," Stheeman said.
"Core government bonds are still fulfilling their role as safe-haven territory when you have a sell-off in equity markets."
Ten-year gilt yields were about a basis point higher on the day at 1.40 percent, well off a two-year high of 1.75 percent struck on Oct. 10.
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