U.K. DMO Shakes Up Issuance to Boost Flexibility of Gilt Sales

  • Changes include sale size reduction, ability to alter calendar
  • DMO chief says seeking to relieve pressure on primary dealers

The U.K. is shaking up the way it conducts government-bond sales as it seeks flexibility in the face of increasingly challenging markets that saw two primary dealers resign in the past year.

The Debt Management Office announced seven changes for the next fiscal year, including smaller auction sizes and greater flexibility to sell debt via banks. The number of U.K. gilt primary dealers has fallen to 19 in this fiscal year, and market makers said at a meeting with officials from the DMO and Treasury in January that tighter regulations are making it increasingly difficult to sell the securities.

Adding to volatility in the U.K. bond market is a June vote on the nation’s future in the European Union and lower reinvestment from matured gilts bought under the Bank of England’s quantitative easing program, according to John Wraith, head of U.K. rates strategy at UBS Group AG in London.

“It seems to be aimed at increasing flexibility, limiting the risk of issue specific squeezes,” Wraith said. “Bid-to-cover ratios are generally still very healthy, but the average has dipped a bit in the past year and there has been the odd genuinely soft auction. The DMO may feel the need to brace itself for the possibility of higher yields.”

After a sale of gilts in January drew the lowest demand since a failed auction in 2009, Robert Stheeman, chief executive officer of Britain’s DMO, said that he couldn’t rule out an uncovered auction happening at some point.

‘More Responsiveness’

The alterations to the remit for the next fiscal year also include increasing the proportion of unallocated issuance to “permit more responsiveness to changing market and demand conditions,” and allowing for more changes to the auction calendar, the DMO said in a statement on Wednesday. It also said gilt tenders will replace the existing ‘tap’ function and it increased the market makers’ non-competitive bid allowance to 15 percent from 10 percent.

“I have no doubt that underlying structural demand for gilts continues to be strong, but we have made some changes to the distribution mechanism at the margin to support smooth remit delivery next year,” Stheeman said in an e-mailed response to questions on Wednesday. “In particular, we’ve looked to help alleviate pressures on the gilt sales intermediation function performed by our primary dealers.”

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