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Osborne to Favor Gilt Issuance as Bills Get the Ax: U.K. Credit

Chancellor of the Exchequer George Osborne
Chancellor of the Exchequer George Osborne is set to raise rather than lower his growth forecasts for the first time since 2010. Photographer: Simon Dawson/Bloomberg

Dec. 4 (Bloomberg) -- Britain will preserve its bond-issuance plans this year to exploit low debt costs and cut sales of Treasury bills instead, as the fastest economic growth since 2010 reduces how much the government needs to borrow.

The Debt Management Office will trim its gilt issuance to 153.7 billion pounds ($252 billion) from the 155.7 billion pounds it estimated in April, according to the median forecast of 19 banks that deal directly with the agency. Primary dealers Goldman Sachs Group Inc., JPMorgan Chase & Co, Barclays Plc, Scotiabank, Royal Bank of Canada, Citigroup Inc. and Toronto-Dominion Bank say the DMO will keep gilt sales unchanged.

In his Autumn Statement tomorrow, Chancellor of the Exchequer George Osborne may scale back his financing needs by as much as 25 billion pounds, or 15 percent, as a result of buoyant tax receipts and the sale of state assets, analysts say. The 10-year yield, which climbed to 2.88 percent today, has averaged 3.78 percent over the past 10 years.

“All of the projection in the financing needs is going to be absorbed by T-bills,” said Alan Clarke, an economist at Scotiabank, one of 21 primary dealers. “It’s less disruptive that way. The government is borrowing long term at a very low level of interest rates, and it wouldn’t want to change its gilt-issuance plan.”

New Forecasts

Osborne is set to raise rather than lower his growth forecasts for the first time since 2010. Britain has expanded by more than any other Group of Seven nation this year, cutting welfare costs and boosting taxes from payrolls, sales and property purchases.

In March, the Office for Budget Responsibility predicted growth of 0.6 percent this year and 1.8 percent in 2014. Those forecasts will be increased to 1.4 percent and 2.5 percent, respectively, according to the median of estimates gathered by Bloomberg.

The Treasury has also received more than 5 billion pounds of extra revenue since September from the sale of shares in Lloyds Banking Group Plc and Royal Mail Plc, reducing the amount it needs to raise from investors.

Rate Bets

The improved fiscal outlook may ease the pressure on government bonds at a time when investors are betting the Bank of England may increase its 0.5 percent benchmark rate as early as the end of 2014. Short-sterling futures expiring in December 2015 are at 1.45 percent, up from about 1 percent in mid July.

Gilts lost 3.6 percent this year through to yesterday, making them the worst-performing Group of 10 sovereign bonds, according to Bloomberg World Bond Indexes. German debt lost 1.2 percent, while Treasuries declined 2.5 percent.

“It’s important for the DMO that they don’t surprise the market with a mid-year fiscal change to the gilt sale program if they can avoid it,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “The market has its expectation for the issuance of duration instruments. A change in T-bills won’t affect overall duration that’s been supplied to the market by much.”

Duration is a measure of the sensitivity of a bond’s price to changes in interest rates.

Foreign Demand

The DMO forecast in April that the stock of Treasury bills -- debt securities with maturities of no more than a year -- will rise to 70 billion pounds at the end of this fiscal year.

External demand could be another consideration. While foreign investors have reduced their holdings of sterling T-bills every month since April, they were net buyers of gilts in the past two months, according to data from the Bank of England.

Gilt sales are forecast to fall for a second consecutive year in 2013-14 after tripling from about 55 billion pounds a year on average in the five years that preceded the financial crisis. Hill predicts the Autumn Statement will lower the government cash requirement by more than 100 billion pounds through March 2017.

“There is a sense that things have turned,” said Jason Simpson, a fixed-income strategist at Banco Santander SA in London. “The Autumn Statement will be, at the margin, constructive for the gilt market at the time when the monetary policy outlook is driving gilt yields higher.”

To contact the reporter on this story: Anchalee Worrachate in London at

To contact the editor responsible for this story: Paul Dobson at

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