Another successful sale would show how the UK government is managing to raise funds for a budget laden with crisis spending, even as it comes just days after the Bank of England lifted rates to 4.5 per cent and left the door open to further tightening. The Debt Management Office is planning to sell £237.8 billion ($446.3 billion) of gilts in the fiscal year 2023 to 2024.
Pension funds were at the centre of the gilts crisis in September, forced to dump their holdings amid the fallout from former Prime Minister Liz Truss’s announcement of unfunded tax cuts. While they’re not the only investors to buy these ultra-long securities, their participation is particularly important in such a supply heavy year.
Britain’s financial services watchdog has since implemented a series of reforms to amend shortcomings in the risk management of LDI investment strategies. That regulatory clarity should encourage fresh buying by those funds, according to Daniela Russell, head of UK rates strategy at HSBC.
“Many are likely to see the syndication as a key point of improved liquidity,” she said. “With long-end yields above 4 per cent, and likely to move lower as we move through the year, current valuations provide an attractive level at which schemes can de-risk.”
BoE data also point to healthy demand for gilts: domestic buyers bought a record number in the first quarter of the year, despite policymakers’ ongoing battle with inflation still at the highest among developed markets.
A surprisingly resilient UK economy has paved the way for additional interest-rate hikes, pushing terminal rate pricing to around 5 per cent later this year, according to money-market wagers.
UK 10-year bonds are poised to lose out to their US equivalents for a record seventh month. The extra yield investors demand to hold UK bonds compared with similar-maturity German ones is increasing for a fourth month, the longest streak since October 2020.
The question now is when investors should jump in without getting stuck with a depreciating bond if rates go even higher.
Ian Fishwick, a fixed income portfolio manager at Fidelity International, said markets were still weighing flagging growth against still-stubborn inflation. The UK economy shrank unexpectedly in March, which seemingly runs counter to the BoE’s biggest upgrade to growth projections in a quarter-century.
Bloomberg
