Recent record low yields on British government bonds are driven by global economic factors and high-grade investors, not speculative inflows of hot money that might point to a bubble, the man who issues the debt said on Wednesday. Robert Stheeman, chief executive of the UK Debt Management Office, told Reuters that he was not able to predict where the market would go next, after British 30-year yields struck an all-time low of 2.639 percent on Monday.
But there was still robust demand for the debt at DMO auctions, and few obvious signs of a bubble. "The pressure on yields that we have seen is part of a global phenomenon," Stheeman said in a telephone interview after finance minister George Osborne set out a budget update.
"It is not as if we are seeing waves of hot money. If pension funds and overseas official institutions are buying our gilts, those seem like pretty solid investors. If they have a bubble mentality, I can't tell." Weak tax revenues mean Osborne was obliged to unveil forecasts that show higher borrowing over the next two years. Combined with extra borrowing to fund larger official foreign exchange reserves, this means Britain will need to raise more than 50 billion pounds ($79 billion) over the next five years above what was planned in March's 2014 budget.
Not all of this will necessarily come from higher gilt issuance, as some may come from higher sales of short-dated Treasury bills or from savers who have government accounts. But compared with forecasts at the time of the budget, "the implication is that the gilt issuance programme will go up," Stheeman said. Simon Peck, a fixed income strategist at RBS, said it was unclear if this had been fully appreciated by the gilt market in the immediate aftermath of Osborne's statement, and that this could lead gilts to underperform other bonds in future.
Stheeman said the message from the DMO and the Treasury was generally readily grasped by markets and caused few surprises. Record-low long-dated gilt yields do not necessarily mean the DMO is planning to boost its issuance in this area compared to its current pattern. Stheeman said the higher cost of long-dated issuance had to be taken into account, as well as the fact that Britain's gilt issuance was already far more skewed towards long-dated bonds than other advanced economies.
He also said he was keeping a very close eye on the impact of measures Osborne announced in his March budget, which appeared to be slightly reducing pension funds' demand for long-dated gilts, and probably would do so further. "Over time it seems realistic that demand from the domestic pension investor base may move slightly shorter, but it's likely to be a very long, drawn-out process," Stheeman said.
Comments
Comments are closed.