(Bloomberg) - Investors are braced to soak up the highest U.K. bond issuance in eight years and think the final amount could soar even higher.
The U.K. Debt Management Office said it will issue 156.1 billion pounds ($202 billion) of gilts in the 2020-21 fiscal year, the highest since 2012-2013. The financing plans could still go up as the country’s economic forecasts do not yet incorporate the most recent estimates of the virus impact, nor the government’s policy response.
“Higher gilt issuance is now about as close to a metaphysical certainty as you can get in financial markets,” said Ranko Berich, head of market analysis at Monex Europe Ltd. “Markets are not only willing to accept fiscal spending but are now actively cheering it.”
The gilt sales, up almost 20 billion pounds from the current financial year, will help fund a stimulus package pledged in Wednesday’s budget by U.K. finance minister Rishi Sunak. Policy makers are trying to insulate the post-Brexit economy from the coronavirus, with the Bank of England making an emergency 50-basis-point rate cut earlier in the day.
U.K. long-dated bonds pared losses as the issuance plan was about 10 billion pounds below estimates compiled from primary dealers. Ten-year gilt yields ended the day up three basis points at 0.28%, after rising as much as seven basis points.
“This fiscal and monetary package is sufficient to prevent COVID-19 from dragging the economy quickly into recession,” said Peter Chatwell, head of fixed-income strategy at Mizuho International Plc. “The main uncertainty was the impact on gilt issuance, which has underwhelmed, allowing gilts to make some gains around that announcement.”
With Brexit uncertainty and disruption from the virus in the coming months, the DMO could revise its issuance if deficits keep increasing, said Pooja Kumra, a senior European rates strategist at Toronto-Dominion Bank in London.
While gilt swap spreads should rise from the historic lows they reached in the current crisis, that doesn’t mean demand will shrink, according to Christoph Rieger, head of fixed-rate strategy at Commerzbank AG (DE:CBKG).
“Given the coherent package of measures across all authorities presented today, and in particular the monetary support from the BOE, I don’t think the DMO will struggle finding buyers,” he said. “Maturities are long, interest-rate expenses are historically low and refinancing risks are subdued.”
(Adds comments from Commerzbank, Toronto-Dominion Bank.)
