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April 25, 2009

Gilt ‘Indigestion’ Looms as U.K. Plans Record Sales

Filed under: legal — Tags: , , — ManInBlack @ 12:51 am

The U.K.’s plan to sell a record 220 billion pounds ($318 billion) of gilts this year to revive the economy may cause investor “indigestion,” according to some of Britain’s biggest bond traders.

The amount, 50 percent more than the 146.4 billion pounds sold in the fiscal year that ended March 31, may be too much for the market to absorb, according to Royal Bank of Scotland Group Plc. The issuance plan, announced by the London-based Debt Management Office yesterday following the government’s budget report, is a “surprise,” according to Barclays Capital.

“The scope for bouts of indigestion going forward is high,” Richard McGuire, said senior fixed-income strategist in London at RBC Capital Markets. “In terms of the market’s ability to absorb this supply, the key is whether the budget presents a credible road map toward fiscal sustainability and here we would argue it is lacking.”

Prime Minister Gordon Brown is betting the bond sales will help to haul the nation out of the worst recession since World War II and revive the government’s prospects of winning a general election next year. Gilts fell following yesterday’s announcement, with the yield on the 10-year note rising 14 basis points to 3.44 percent in London.

The unprecedented sale plan raises the risk that bond auctions will fail, former U.K. Chancellor of the Exchequer Norman Lamont said in a Bloomberg Television interview this week. The debt office couldn’t find enough buyers at a sale of 40-year bonds on March 26, the first time since 2002 that demand fell short.

Sale Plan

The Treasury will issue 74 billion pounds of securities maturing in as much as seven years, 70 billion pounds of bonds coming due between seven and 15 years, and 27 billion pounds of gilts maturing in more than 15 years, the debt office said yesterday. It will offer a further 19 billion pounds of long- dated debt through syndicated deals and so-called mini tenders, and 30 billion pounds of inflation-protected gilts, it said.

U.K. debt underperformed German bonds this year, as investors demanded higher yields to compensate for the prospect of increased supply. Gilts lost 2 percent, while bunds returned 0.03 percent, according to Merrill Lynch & Co. indexes. The yield difference, or spread, between 10-year gilts and bunds widened to 31 basis points today, the most since March 5, compared with six basis points at the start of the week.

“It’s a challenging remit but I am confident that there is strong ongoing demand for gilts and we will work closely with the market to successfully deliver it,” Robert Stheeman, chief executive officer of the debt office in London, said in an e- mailed response to questions yesterday cheap payday loan. “From the perspective of the gilt market, which is highly efficient, we don’t think that a funding strike is in any way a realistic scenario.”

Market ‘Anxiety’

While Chancellor of the Exchequer Alistair Darling said in his budget yesterday that the economy will expand 1.25 percent next year after a contraction of about 3.5 percent in 2009, the International Monetary Fund expects the country to stay mired in recession. The Washington-based lender predicted a contraction of 0.4 percent next year after a 4.1 percent slump in 2009.

“The main anxiety in the market is that this might not be the worst of it,” said Robin Marshall, director of fixed income in London at Smith & Williamson Investment Management. The U.K. may sell “more next year given the economic outlook. The key is growth and how soon the financial sector functions properly again.”

The debt office said March 18 that it would issue 147.9 billion pounds of bonds this year. The revised plan is almost five times the average in the five years before 2007 and surpassed every forecast in the Bloomberg survey.

It’s “20 billion pounds more than the highest estimates, and there are going to be more syndicated deals than the market expected,” said Adam McCormack, head of gilt sales at Barclays Capital in London. The median forecast of 14 of 16 banks that deal directly with the Treasury was 180 billion pounds.

Darling said the government’s budget deficit this year will reach 175 billion pounds, or 12.4 percent of gross domestic product. That’s the biggest shortfall in the Group of 20 nations and surpasses the 12 percent forecast in the U.S.

The U.K. will raise gilt issuance to over 240 billion pounds in the next fiscal year and to almost 250 billion pounds in the fiscal 2011-12, according to Citigroup Inc.

“The U.K. is mortgaged up to the hilt,” Paul Day, chief market analyst at MIG Investments SA, said in an interview from Singapore yesterday.

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