U.K. Bonds Set for Boost as Borrowing Seen Falling to Decade Low

  • Survey of primary dealers sees issuance at 98.2 billion pounds
  • Gilts may outperform bunds, Treasuries in near term: NatWest

U.K. government bonds will get a boost with supply set to drop to its lowest in over a decade following this week’s Spring Statement.

The Debt Management Office will slash its issuance target for the 2018-2019 fiscal year by 16.9 billion pounds ($23.4 billion) from 115.1 billion pounds in 2017-2018, according to the median forecast of nine primary dealers surveyed by Bloomberg. Even as global yields continue to rise against an improving economic backdrop, the decline in supply means gilts will outperform German and U.S. debt in the short term, according to NatWest Markets.

Downward Trend

Analysts expect gilt issuance to drop again after hitting the lowest since 2008 this year

Source: DMO

While the Spring Statement is less of an event for markets than it used to be, with the big decisions on U.K. finances now coming in the Autumn budget, the government borrowing plan for the coming fiscal year will be key for investors.

“Whichever way you look at the numbers, we end up with what is likely to be the smallest gilt remit in over 10 years,” said Simon Peck, a strategist at NatWest Markets. “I wouldn’t be surprised to see some near-term outperformance in gilts but we would view this as an opportunity to fade as we are expecting the Bank of England to hike in May and signal a bias toward further tightening later this year.”

The yield on 10-year gilts has retreated about 20 basis points from a two-year high of 1.69 percent reached in mid-February. It rose three basis points on Friday.

Below is a roundup of analyst views on the budget:

NatWest Markets

  • “The Spring Statement is not expected to bring any changes to the overall fiscal policy stance,” strategists including Simon Peck write in a research note
  • Expect gilt issuance to fall to GBP94.8b for 2018-2019, an 18% drop and the lowest level in over 10 years
    • See one less index-linked syndication as a result of this, so two conventional and two I/L for the year; recommend buying 30-year breakevens as a result

Santander GCB

  • “The pace of improvement within the U.K. public finance data has outstripped market expectations in recent months,” strategists including Adam Dent write in a note
  • Sees gilt issuance for 2018-2019 at GBP98.2b
    • Expects DMO to reduce number of auctions to two nominals and two linkers
  • Gilt spreads at long end vulnerable to correction next month once market adjusts to lighter supply
  • Three auctions a month “would likely feel very sparse, which could help exacerbate the gilt-supportive impact” of upcoming asset purchases

Morgan Stanley

  • “With a hawkish monetary policy committee, more limited supply and APF repurchases, we favor flatteners in the near term,” analyst Shreya Chander writes in note
  • Sees GBP95.8b of supply for 2018-2019
  • Flattening could unwind in 2019, with supply expected to increase sharply back to 2016/2017 levels just as the U.K. officially exits the EU
  • Have heard that accounts have been on the sidelines through the APF redemptions, waiting for a better opportunity to enter steepeners as the “trade for 2018”, but would urge treading carefully until the funding plan is announced

Nomura International Plc

  • “Do not expect the DMO to feel any great need to radically alter issuance,” Nomura strategists including Anne Karina Asbjorn write in note
  • See gross gilt issuance drop by GBP10b to GBP104.5b due to recent better monthly public finance out-turns making for an overfund in the current fiscal year, a slightly smaller deficit in the coming fiscal year and fewer redemptions in 2018-19
  • Forecast slight decrease in short conventionals, increase in long conventional
  • DMO may be wary of increasing the auction sizes regardless of what GEMMs and investors are saying but it is another thing to watch out for
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