UK debt office plays down risk of failed gilt auctions
Britain is unlikely to struggle to sell bonds at future debt auctions, the head of the UK’s Debt Management Office said on Wednesday, after the Bank of England’s governor said market turmoil in March had risked causing difficulties.
Speaking at a hearing of the Treasury select committee, Sir Robert Stheeman said it was “not obvious” to him why Britain should expect an uncovered gilt auction — where there is not enough demand for the bonds being sold — soon.
“We’ve had over 500 auctions since the last uncovered auction in 2009, and it’s not obvious to me that we should expect another one any time soon,” Stheeman said.
“The gilt market is functioning well and is stable,” he added.
If a bond auction did fail to attract sufficient bids to sell the full amount on offer, that should be viewed as a technical market problem, rather than raising a question mark over the government’s creditworthiness, he added.
“I do realize that uncovered auctions make headlines. I can’t deny that. From our perspective,” he continued, “we would view it clearly as a technical imbalance in market supply and demand at that point when an auction occurs”.
“It is nothing to do with a credit issue or the ability of any government to raise funds,” Stheeman added.
The DMO is in the middle of selling a record £225bn of bonds between April and July to fund coronavirus-related borrowing.
In March, Stheeman said there was a lack of liquidity in the British government bond market due to global tensions from the coronavirus, and subsequently said there had been a risk then of a failed auction until the BoE took action.
Demand for British government debt has increased, with yields falling to record lows, since the Bank of England said it would buy £200bn of gilts and took other steps to boost liquidity in March.
BoE governor Andrew Bailey said earlier this week that global market turmoil in March was sufficiently acute that without intervention from the central bank, “the government would have struggled to fund itself in the short run”.
However Bailey said the BoE’s intervention was motivated by its desire to ensure market stability and restore inflation to its two per cent target, and that it was not the Bank’s job to ensure every gilt auction was a success or to underwrite government finances.