Osborne Seen Keeping Gilt Issuance Plans as Borrowing Overshoots

  • Primary dealers see shortfall covered by more Treasury Bills
  • Gilt issuance forecast to stay at 127.4 billion pounds

Chancellor of the Exchequer George Osborne is set to concede this week that he’ll have to borrow more than forecast four months ago. The good news for bondholders is he’ll probably use flexibility in shorter-maturity debt to fill the hole.

Instead of issuing more gilts, the Debt Management Office will make up a funding shortfall of as much as 9 billion pounds ($13.6 billion) in the current fiscal year by increasing sales of Treasury Bills, debt instruments that mature in less than 12 months, according to primary dealers Lloyds Banking Group Plc, Nomura International Plc, Royal Bank of Canada, Royal Bank of Scotland Group Plc and Societe Generale SA. Gilt issuance is forecast to stay at 127.4 billion pounds.

Osborne presents his Autumn Statement and Spending Review on Nov. 25 amid weaker revenue and stronger spending than officials predicted in July. In the first seven months of the fiscal year alone, the central government cash requirement, the basis of the DMO’s financing remit, was 52.3 billion pounds, suggesting the Office for Budget Responsibility will raise its full-year prediction of 71.6 billion-pounds.

“It looks as though the central government budget is not doing quite as well as hoped for in July,” said Sam Hill, a senior economist at RBC, one of 20 financial institution that trade gilts directly with the Treasury. “This is an important Autumn Statement, more so because of the politics than economics. It seems likely that any increase in borrowing can be financed by increasing T-bill issuance, rather than selling more gilts.”

Disappointing Backdrop

Since the Summer Budget on July 8, gilts have returned 1.5 percent, outperforming U.S. Treasuries but lagging bonds of the euro-region, where the European Central Bank is considering adding stimulus. Ten-year gilts yielded 1.85 percent on Tuesday.

The latest report on the health of the public finances provided a disappointing backdrop for Osborne as he seeks to deliver on a commitment to turn a budget deficit of about 5 percent of gross domestic product last year into a surplus by the end of the decade.

His preferred measure, net borrowing, was 8.2 billion pounds in October, the largest for the month since 2009, as government receipts fell 1.8 percent and spending increased 3.1 percent.

Spending Review commitments to boost security in the wake of the Paris attacks and plow billions into infrastructure will come against a backdrop of further cuts to government departments. Pledges to protect spending on health, defense, schools and overseas aid mean some departments are facing reductions of as much as a third over the next four years.

Asset Sales

Not every one expects gilt-issuance plans to be untouched. With asset-sale proceeds set to be 5 billion pounds below target, Bank of America Merrill Lynch predicts an extra 10 billion pounds of financing will be required. This will be split evenly between T-bills and gilts, bringing bond issuance this year to 132.4 billion pounds, it said. 

“That borrowing overshoot reflects both slowing growth in tax receipts and rising spending growth,” Bank of America analysts Robert Wood and Sebastien Cross wrote in a note. “It is too early to tell whether the the overshoot so far this year is either real or will prove lasting.”

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