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U.K.’s Pandemic Bond Burden Seen Hitting Half-a-Trillion Pounds

ForexNov 25, 2020 02:00AM ET
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© Reuters. U.K.’s Pandemic Bond Burden Seen Hitting Half-a-Trillion Pounds

(Bloomberg) -- The biggest year ever for U.K. bond sales may top out just shy of half-a-trillion pounds, as the government pushes ahead with a borrowing spree to spend its way out of the coronavirus pandemic.

Britain’s Debt Management Office will announce on Wednesday almost 100 billion pounds ($133 billion) of extra issuance for the December-March period, taking the full fiscal-year amount to 482.8 billion pounds, according to the median estimate in a Bloomberg survey of 12 primary gilt dealers. That’s more than twice the previous record set during the financial crisis.

The borrowing target is seen shifting higher with Chancellor of the Exchequer Rishi Sunak set to announce a spending increase on public services. The nation’s debt load has already climbed above 2 trillion pounds -- an amount bigger than the economy for the first time since the 1960s.

Still, the surge in debt sales hasn’t pushed borrowing costs higher, thanks to the Bank of England’s bond-buying program. The central bank’s purchases have helped soak up the increased issuance, easing pressure on the market and helping to lower the yield on 10-Year bonds by about 50 basis points this year to 0.33%.

The BOE expanded the so-called quantitative easing program this month by 150 billion pounds.

“The U.K. economy is on a large amount of life support right now,” said Liam O’Donnell, a money manager at Aberdeen Standard Investments. “A modest rise in yield is fine, anything else is effectively a short circuit to activity while the economy still reels from the crisis.”

Inflation Gauge

With a vaccine developed by the University of Oxford and AstraZeneca (NASDAQ:AZN) Plc found to be highly effective -- along with those from Pfizer Inc (NYSE:PFE), and Moderna (NASDAQ:MRNA) Inc. -- and a Brexit trade deal getting closer, economic prospects for 2021 could be in for a boost. The nation’s deficit grew less than expected in October, data showed last week.

Alongside the DMO’s remit, traders will also be focusing Wednesday on a long-awaited report on replacing the maligned Retail Price Index with the CPIH as the main inflation gauge. With around 500 billion pounds of index-linked gilts tied to the former, the main risk for markets is an earlier shift to the new benchmark, say by 2025, rather than than the widely expected 2030.

“An earlier move to CPIH would come with some modest fiscal benefits,” wrote Citigroup Inc (NYSE:C). strategists led by Benjamin Nabarro. It has “the greatest potential to move the market, although short positioning may curtail any re-pricing lower.”


U.K.’s Pandemic Bond Burden Seen Hitting Half-a-Trillion Pounds

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