British government bond dealers expect little change to the country's gilt issuance plans this year or next after finance minister Philip Hammond sets out his budget plans on Wednesday, despite lower-than-expected public borrowing so far this year. Public sector net borrowing for the 12 months to the end of March 2018 is expected to fall to 51.4 billion pounds ($68.0 billion) from the 58.3 billion pounds forecast in March by the government's budget watchdog, according to a Reuters poll of 14 of the 16 wholesale primary dealers known as gilt-edged market makers (GEMMs).
But GEMMs - the only financial institutions authorised to buy newly issued bonds direct from the British government - expect issuance to be reduced by just 800 million pounds on a median basis from the 114.2 billion pounds set out in April. This 113.4 billion pounds would still be the lowest annual issuance since the eve of the financial crisis in 2007-08. Hammond is under pressure from Conservative colleagues to boost the party's fortunes after it lost its majority in a botched June election, at a time when growth is slowing and household finances are squeezed following a jump in inflation since June 2016's Brexit vote.
However, financial markets expect Hammond to balance any extra spending with money raised elsewhere, and see him sticking to a long-term goal to eliminate the budget deficit by the middle of the next decade.
"Given the domestic political backdrop and the ongoing uncertainty around Brexit negotiations we think there is very little appetite for the Chancellor to ... shift to a more expansionary fiscal stance, which would potentially undermine financial market credibility," said Francis Diamond, a gilt strategist at J.P. Morgan. Any positive impact on gilt prices of lower issuance this year would probably be cancelled out by a deterioration of Britain's longer-term fiscal outlook, he said.
Weaker growth and gloomier assumptions about Britain's economic productivity as it prepares to leave the European Union were likely to lead the government's Office for Budget Responsibility to price in an extra 28 billion ponds in cumulative borrowing by 2021/22, he added.
Britain's reduced public borrowing needs for the current financial year would be mostly accommodated by further reducing the stock of short-dated Treasury bills, according to the poll.
GEMMs on average predicted a 13.85 billion pound net reduction in T-bills, compared with the 9.5 billion pound reduction planned in April by the UK Debt Management Office. Public sector net borrowing is predicted to fall to 43.0 billion pounds in the 2018/19 financial year, according to the poll, slightly less of a decline than the drop to 40.8 billion forecast by the OBR in March.
GEMMs did not expect the DMO to change its guidance of gross financing needs of 129 billion pounds for the next financial year, which includes money raised direct from the public as well as new and refinanced gilt borrowing. "A lower 2017 funding requirement and a cut to the gilt issuance remit could trigger some modest outperformance of gilts," UBS strategist John Wraith said. "However, significantly higher numbers for future years will add to mounting market concerns over the UK's economic prospects over the coming years, as the perilous exit from the EU is navigated."
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