UK DMO's Stheeman on T-bills, market volatility and gilt issuance

LDI hangover?    

DMO Chief Sir Robert Stheeman was hopeful, when speaking to Total Derivatives today, that he didn’t expect that the UK, and specifically the gilt market would make the front pages this week, in contrast the Autumn of 2022. But is the DMO still grappling with a hangover from the LDI crisis, in addition to structural shifts in the demand for gilts as pension scheme de-risking shifts from leveraged LDI towards insurer buy-ins, all helped by the rise in interest rates over the last year.

Last year’s LDI-driven volatility is still “in the back of our minds,” Stheeman acknowledged, before stressing that “market conditions have  stabilised significantly, although they remain volatile.”

But only up to a point. 5y gilts have swung in roughly a 70bps range over the last week since SVB’s collapse, while pressure on Credit Suisse today has ensured that gilt yields are not far off recent lows.

Structural shift in demand at the long end has been happening for a while

As for changes in demand, while the DMO CEO agreed that there had been something of a structural shift in demand for long gilts to shorter on the curve, he contended that this has been happening for several years but that there was still plenty of demand for for longs from pension fund and pension insurer for hedging purposes. 

With the gilt future off the highs tested ahead of the remit but still more than 1.5 points stronger, Stheeman reminded that all the major bond markets had been roiled by recent events. Gilts may be underperforming 10y Bunds by around 12bps today but its hard to pin that on the fact that planned gilt issuance of £241.1bn was around £8bn higher than the Bloomberg consensus.

Indeed gilts are 1bps to 2bps richer on asset swap at the time of writing, beyond the very front end. And while linker breakevens are 6-11bps tighter, the DMO’s linker plans were in broadly line with the market expectation. Most of the breakeven tightening arrived before the publication of the remit, as global nominal curves bull-steepened and energy prices fell.         

Treasury bill issuance plans

A key reason for the announcement of higher-than-predicted gilt issuance today was arguably the DMO’s smaller than anticipated increase in T-bill sales for debt management purposes. However, Stheeman tended to play that down, stressing instead that the DMO’s T-bill issuance plans reflected a mixture of their desired contribution to financing, as well as the role they can play in the government’s cash management operations. As a consequence, the modest £5.0bn contribution to debt financing from T-bills expected for 2023-24 did not represent a particular in year target, and that the overall stock is likely to fluctuate in year, largely   to reflect cash management needs.

 Recent market volatility  

As the impact of market volatility on the GEMMs - and on the planned split between auctions and syndications, Stheeman’s view was that the market’s preferences for auctions versus syndications tended to vary and the DMO tried to tailor its plans accordingly. Syndications are planned at 11.2% or £27bn of issuance in 2023-24, compared with 83.8% for auctions.

“We want orderly markets and (given volatility) there’s always the risk of a less than straightforward issuance event. We try to design the remit that is appropriate to the current market environment to limit that risk,” Stheeman explained.

As for the GEMMs, he acknowledged that market makers needed to have the balance sheet and risk capital to act as successful intermediaries, and the DMO paid attention to the pressures on the market and the overall level of risk being supplied.

Turning to the DMO’s decision-making around the planned division of gilt issuance in 2023-24 (36% shorts, 27% mediums, 21% longs and 11% linkers, plus 5% unallocated), Stheeman stressed the DMO’s “bottom-up” practical approach in terms of operational delivery. The DMO has an eye on both demand for the different sectors, as informed by the consultation meetings with GEMMs and end-investors, and the DV01 supplied – including the pattern of DV01 through the year.  Hence the attention paid to setting the absolute amounts of gilt issuance per maturity bucket – which are higher in all cases this year - as well assessing demand and cost/risk to the government, echoing the tone of comments by attendees heard by the DMO at the January consultation meetings.      

Syndications coming after consultation  

For background, please see the remit (link) and the annual Debt Management Report (link). The agenda for the DMO’s next quarterly market consultation meetings, set for March 20, is available here (link), with plans for two syndications in the quarter: a new or existing medium or long-dated linker in the second half of April, and   a new long conventional in May.