UK debt agency sees little rise in yields despite rising issuance

British government bond yields do not look poised for a big increase, despite the higher public borrowing entailed by finance minister Philip Hammond's budget statement earlier on Wednesday, the UK Debt Management Office said. Robert Stheeman, chief executive of the UK Debt Management Office, told Reuters the economic growth downgrades in the budget implied official interest rates - the main driver of gilt yields - were likely to stay low.
"In the (OBR forecast) scenario ... it is not obvious that this would suggest a significantly higher yield environment," Stheeman said, referring to forecasts the British government's forecasting agency, the Office for Budget Responsibility. The OBR slashed growth forecasts for Britain's Brexit-bound economy and expects Hammond to borrow a lot more going into the 2020s, after he said he would spend more in the next couple of years to help voters.
The DMO nudged up its gilt issuance forecast for the current financial year by 900 million pounds ($1.20 billion) to 115.1 billion pounds, despite lower government borrowing needs this year because of better-than-expected tax revenue. The higher gilt issuance is needed because another arm of government, National Savings & Investment, was unable to raise as much money as planned from British households after its interest rates became uncompetitive in the run-up to the BoE's first rate increase in a decade earlier this month.
The DMO's gilt issuance this year is still set to be the lowest since the 2007/08 financial crisis. But government borrowing needs will rise "quite significantly" in future, Stheeman said. The 'gross financing requirement' for 2019/20 - when Britain is due to leave the European Union - rises to 151.6 billion pounds, 20.7 billion pounds more than previously thought. Finance needs for the year after, which include debt refinancing as well as new borrowing, will be 24.0 billion pounds higher.
British government bond prices changed little after the budget, with 10-year yields edging only a fraction higher to 1.28 percent in response to the greater borrowing needs. Stheeman said this reflected the market's resilience since Britain voted to leave the EU in June 2016. "If you think about the various pressures that the gilt market and the UK have faced over the last 18 months or so ... demand for gilts has held up remarkably well. The currency tends to be the asset which investors are much more focused on in terms of political developments," he said.
None of the 16 major banks which act as wholesale gilt primary dealers, known as gilt-edged market makers (GEMMs), looked about to quit this role as a result of Brexit, he added. "London is a financial centre with the infrastructure already firmly in place to allow the gilt market to flourish. GEMMs operate within that market and for them to move out of gilts because of Brexit ... doesn't sound very likely," he said. Broader conditions in the gilt market also appeared more positive than two years ago, when Credit Suisse and Societe Generale quit as GEMMs amid concerns about low profits and increased regulatory requirements.