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Brown PM at No. 10 Last Time Gilt Sales Seen So Low: U.K. Credit

March 18 (Bloomberg) -- U.K. government bond sales are set to fall to a six-year low as the strongest economic growth since 2007 boosts Prime Minister David Cameron’s tax receipts.

The Debt Management Office will sell 151 billion pounds ($251 billion) of gilts in the fiscal year starting April 1 compared with 153.7 billion pounds in the current year, according to the median forecast of 19 primary dealers surveyed by Bloomberg. The figure includes 62.2 billion pounds to finance maturing bonds, 21 percent more than this year. Net issuance is seen dropping 13 percent to 89 billion pounds.

In his budget tomorrow, Chancellor of the Exchequer George Osborne will draw support from the best outlook since the global financial crisis. Consumer spending driven by a booming housing market is helping to bring down a deficit that stood at a record 11 percent of economic output when his Conservative-led coalition took office in 2010.

“The U.K. economy continues to see a strong rebound and has yet to show any indication at this point that it’s slowing down,” said Richard Kelly, a senior strategist in London at Toronto-Dominion Bank, one of 21 primary-dealer banks that trade with the DMO directly. “That’s supportive for the government in its fiscal-adjustment efforts.”

Gilt issuance is on course to fall for a third straight year, the longest run since the DMO took over debt management from the Bank of England in 1998, based on the forecasts. Sales reached a record 227.6 billion pounds in 2009-10 in the aftermath of the worst recession since World War II.

Revenue Boost

U.K. government bonds returned 2.8 percent this year through yesterday, beating Treasuries and German securities, which gained 1.8 percent and 2.5 percent, according to Bloomberg World Bond Indexes. The 10-year yield was little changed at 2.68 percent as of 12:30 p.m. London time, falling from more than 3 percent on Dec. 31.

The British economy, which expanded 1.8 percent last year, is set to grow 2.7 percent this year, according to the median of analyst estimates compiled by Bloomberg.

That’s boosted sales taxes and stamp duty on property purchases, putting Osborne on track to undershoot the 2013-14 budget deficit forecast of 111 billion pounds -- 6.8 percent of gross domestic product -- made by his fiscal watchdog in December. Osborne will unveil new projections tomorrow.

Political Capital

With a general election in 14 months and Cameron’s Tories still about 6 percentage points behind the Labour opposition in opinion polls, Osborne will use the budget to highlight the recovery and claim that an austerity program set to continue to the end of the decade is working. Economists including Brian Hilliard urged caution.

“We’ve still got a long way to go,” said Hilliard, chief U.K. economist at Societe Generale SA in London. “The deficit is still about 6 percent of GDP, and that is awfully high. We’re about halfway to where we should be. It’s not a situation where we can say gilt issuance is coming down, so we can throttle back on austerity.”

Based on the analyst estimates, gilt sales would be the lowest since the financial crisis in 2008-09, when Labour’s Gordon Brown was Prime Minister. They’d still exceed the annual average of 141 billion pounds in the past 10 years, as an increase in maturing debt sustains borrowing needs.

Redemptions will swell to 79 billion pounds in 2017-2018, according to DMO projections, as securities sold to fund the deficit and rescue banks through the global credit crunch start to mature.

Average Yields

The yield on 10-year gilts will rise to 3.40 percent by the end of the year, according to the median of almost 30 analyst estimates compiled by Bloomberg. On an aggregate basis, gilts yields have risen to 2.38 percent from a record low of 1.52 percent in August last year, compared with the average of 4.80 percent in the past 20 years, according to Bank of America Merrill Lynch Indexes.

“The fiscal outlook has improved and we expect a reduction of around 40 billion pounds in net borrowing over the next five years,” said Shahid Ladha, head of U.K. rates strategy at BNP Paribas SA in London. “In isolation this is positive for gilts although we expect the improvement in the economy to drive yields higher later in the year.”

Following is a table of primary-dealer gilt sales estimates:

Barclays Plc - 150 billion pounds
BNP Paribas SA - 150 billion pounds
Citigroup Inc. - 146 billion pounds
Credit Suisse Group AG - 157 billion pounds
Deutsche Bank AG - 145 billion pounds
Goldman Sachs Group Inc. - 145 billion pounds
HSBC Holdings Plc - 157 billion pounds
JPMorgan Chase & Co. - 153 billion pounds
Lloyds Banking Group Plc - 134 billion pounds
Bank of America Corp. - 147 billion pounds
Morgan Stanley - 153.7 billion pounds
Nomura Holdings Inc. - 157 billion pounds
Royal Bank of Canada - 151 billion pounds
Royal Bank of Scotland Group Plc - 159 billion pounds
Banco Santander SA - 153 billion pounds
Scotiabank - 145 billion pounds
Societe Generale SA - 142.5 billion pounds
Toronto-Dominion Bank - 153.2 billion pounds
UBS AG - 153.2 billion pounds

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

To contact the editors responsible for this story: Paul Dobson at Andrew Atkinson, Keith Jenkins

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