UK DMO remit: More gilts as DMO trims bill issuance

The DMO's remit announced slightly more gilts than expected, mainly due to conservative plans for bills and NS&I. Still, the split was as expected.

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More gilts than expected as DMO trims bill issuance

Gilts remain at session highs following the publication of the DMO’s new remit (link) and more comprehensive annual Debt Management Report (link). Planned gilt issuance of £241.1bn for 2023/24 is above the consensus of around £233bn and up sharply from £169.5bn this year, but the split is in line with forecasts and the turmoil at Credit Suisse (see Total Derivatives) is obviously the main market driver today, bull-steepening every curve led by EUR and USD but also affecting gilts.


Indeed, the modest £8.1bn overshoot to gilt issuance is due mainly to lower-than-expected net Treasury bill supply of £5.0bn, after £33.2bn in 2022-23, and the DMO’s projection of only a small rise in planned NS&I net financing to £7.5bn, from £6.1bn in 2022-23.


Despite the overshoot in the total, the proportionate gilt issuance split is largely as expected:


Shorts: £86.7bn (36%) versus 37% Bloomberg consensus

Mediums: £65.3bn (27.1%) versus 26.0%

Longs: £32.9bn (21.1% including £18.0bn in 4 syndications) versus 21.0%

Index-linked: £17.2bn (10.9% including £9.0bn in 3 syndications) versus 10.0%

Unallocated: £12.0bn (5.0%)  


Next up, the DMO will release the agenda for the GEMMs and Investors quarterly consultation meeting later today, with the market expecting a new 40y via syndication for launch in the quarter.


Shortly before the publication of the Remit gilt yields were 18-22bps lower led by the front end with Credit Suisse shares down 25% and CS Group CDS 218bps wider as the market waits for news from either CS or the SNB, perhaps via a funding backstop. UK bank shares were 5% to 9% weaker, led by Barclays. Since the remit, CS shares have come back to -23% and CDS to +160bps, and UK banks are 4% to 8% lower.


SONIA futures had surged by as much as 35bps in the reds and whites before the Chancellor kicked off, but that’s more like +29bps now. The SONIA strip implies only around a 43% chance of a 25bps hike at the MPC next meeting, while cuts from the current 4% Bank Base rates are today priced from around Mar24 onwards.        


Gilt asset swaps have richened from earlier session lows following the remit and are now  +1.5bps in 2y (versus a -4.5bps move in 2y UST spreads and a +10bps richening in Schatz €STR ASW. 5y and 10y gilt spreads are also richer post remit, at +6bps and +3bps, while 30y spreads are only +0.5bp.  


The risk-off nominal rally (the FTSE is down 3%, as well as the banks), a $2.7 fall in Brent futures and a 4% fall in Dutch gas futures all contributed to weakness in linkers before the DMO’s announcement. Cash breakvevens are currently 7-17bps tighter led by the front end and real yields are 8-10bps lower.


Longer term, the OBR’s new forecasts for PSNB and CGNCR, plus redemptions, imply a still-large financing requirement rising from £255.2bn in 2023-24 to £270.8bn in 2024-25 before beginning to fall slowly.


Finally, cyclically-adjusted net borrowing is forecast to shrink by 2.3% of GDP in 2023-24, implying a moderately restrictive fiscal stance for the BOE to incorporate this year, but the implied fiscal tightening then stops in 2025-26.