By David Milliken
LONDON (Reuters) – Bond dealers expect Britain to trim debt issuance plans for the current financial year, compared with those made just after September’s “mini-budget”, but see a big jump in issuance next year, a Reuters poll showed on Wednesday.
Finance minister Jeremy Hunt will set out new borrowing plans on Thursday to shore up confidence in Britain’s public finances, after his predecessor Kwasi Kwarteng’s Sept. 23 statement led to Liz Truss’s resignation as prime minister and forced the Bank of England (BoE) to intervene in the bond market.
Banks that can bid directly at British government bond auctions – known as gilt-edged market makers (GEMMs) – expect on average for Britain to issue 185 billion pounds ($221 billion) of bonds in 2022/23, down from 194 billion pounds pencilled in by the United Kingdom Debt Management Office (DMO) on Sept. 23.
However in the 2023/24 financial year, gilt issuance is expected to jump to 238 billion pounds, according to the median poll forecast, the second highest ever after the 486 billion pounds of issuance in 2020/21 to fund COVID-19 support measures.
“This will have lasting implications for the market,” said Theo Chapsalis, head of UK rates strategy at Morgan Stanley.
“While we envision a growth slowdown, which normally would be positive for gilts, the combination of ongoing high supply along with lingering high inflation will still make gilts a less attractive asset within the fixed-income universe,” he added.
The scale of British government bond issuance becomes even more stark when set against the fact that the BoE is now selling down its more than 800 billion pounds of gilt holdings, in sharp contrast to previous periods of heavy issuance when BoE quantitative easing was in full swing.
Adjusting for BoE sales and maturing gilts, RBC estimates there will be 228 billion pounds of net issuance next year – almost 100 billion pounds more than the previous record of 130 billion pounds in 2010/11, after the global financial crisis.
The downward revision to gilt issuance for the current financial year reflects the reversal of many of Kwarteng’s tax cuts and a fall in natural gas prices that lowers the short-term cost of temporary energy subsidies.
Jamie Searle, rates strategist at Citi, said the market would be more focused on issuance plans for the next financial year, rather than further ahead.
“It feels like there shouldn’t be too many surprises, but the gilt market remains febrile, and even small news could create oversized reactions,” he said.
The DMO was most likely to reduce issuance of short- and medium-dated gilts, given that was where the bulk of September’s increase was concentrated, he added.
Net Treasury bill issuance was seen unchanged at September’s 40 billion pounds, according to the median poll forecast.
British 10-year gilt yields were trading at around 3.38% on Tuesday – just below where they were before the Sept. 23 statement and well short of the 14-year high of 4.632% they struck on Oct. 12.
Gilt issuance is distinct from public sector net borrowing (PSNB), the main borrowing measure forecast by Britain’s Office for Budget Responsibility.
Here GEMMs expect PSNB, excluding public-sector banks, to rise to a median 187 billion pounds, almost double the 99 billion pounds forecast by the OBR in March. Next year it is forecast to fall to 142 billion pounds, versus an OBR forecast of 50.2 billion pounds.
GEMM PSNBx Gross gilt PSNBx Gross gilt
2022/23 issuance 2023/24 issuance
2022/23 2023/24
Bank of America 190 168 150 200
Barclays 179
BNP Paribas 110
Citi 187 185 145 246
Deutsche Bank 180 182 126 217
HSBC 197 194 140 238
J.P. Morgan 192
Morgan Stanley 174 186 129 233
NatWest 192 185 210 284
Nomura 205
RBC 178 174 161 272
Santander 185
Median 187 185 143 238
DMO Sept 194
OBR March 99 50
($1 = 0.8383 pounds)
(Reporting by David Milliken; Editing by Alex Richardson)