(Bloomberg) – Britain plans to sell fewer bonds than expected in the coming fiscal year, softening the blow of the first lending package in more than a decade, which will be financed without help from the Bank of England .
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Britain will sell 124.7 billion pounds ($165 billion) of gilt in 2022-23, about a fifth less than the average expectation in a Bloomberg survey of primary dealers. The nation’s Debt Management Office said it would also sell bills worth £23.2 billion to meet the UK’s funding needs.
The lower-than-expected issuance plan should support the bond as the BOE begins to shrink its balance sheet. For years, the central bank was a major buyer of sovereign debt, and there was growing concern that its departure – coupled with huge bond sales from the government – could weigh on a market already battling high interest rates and rising inflation.
A significantly lower supply supports the rally across the curve, said Pooja Kumra, rate strategist at Toronto Dominion Bank, adding that she sees “a lot of scope” for German bonds and Treasuries to outperform at this point.
UK bonds initially extended their advances before the gains were wiped out after the announcement. The two-year yield fell 13 basis points to 1.28% before narrowing the decline to trade around 1.35%. The yield curve, as measured by the spread between the two- and 10-year rates, reversed an earlier sharp move to flatten two basis points.
The central bank ended its bond-buying program in December, and has since stopped reinvesting the proceeds of mature gilts into its nearly 850-billion-pound portfolio. The BoE will consider actively selling its bond holdings, raising the key rate to 1%, which traders expect will happen in early May.
“We have endeavored to provide a well-balanced funding program that will be readily absorbed by the gilt market,” DMO CEO Robert Steiman said in an interview. “The gilt market has been able to function well without the presence of a very large buyer in the secondary market.”
According to Megum Muhick, a strategist at RBC Europe, the net supply of short-dated gilts will have to be absorbed in the coming fiscal year, which is expected to fall to a record low of data going back to FY 2002-3. , This figure is after accounting for redemptions and previous BOE purchases.
For inflation-linked bonds, the gross issuance is set to be the lowest since the financial year 2008-9. These securities have traded the most expensive against traditional debt in decades in recent weeks as investors seek to hedge against rising price increases.
The UK plans to sell 10 billion pounds of green bonds, with one transaction planned for each quarter of the fiscal year. The DMO said the sale will be focused on the reopening of existing medium and long maturities. The UK has previously said it wants to create a “green curve” for securities.
“We still want to make a green curve, but we also very much want the curve to be meaningful,” said DMO’s Steiman. “This is why we are intending to prioritize building these existing lines of stock at present.”
(Updated pricing, adds context, comments on green gilt sales in last paragraph.)
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