The UK may need to sell near a record amount of bonds in the fiscal year starting April to fund Chancellor of the Exchequer Gordon Brown's budget, due tomorrow.
Brown will set out spending plans, used to determine gilt sales, in his 11th report to Parliament. Barclays Capital, Royal Bank of Scotland Group Plc, Royal Bank of Canada and ABN Amro Holding NV, who are among the 17 gilt primary dealers, expect debt sales of £60-62 billion ($117-$121 billion), after a record £62.5 billion this year and £52.4 billion the year before. „Growth has been strong, tax receipts have been pretty good, but I don't believe the government can afford to borrow much less than this year,” said Jason Simpson, fixed-income strategist at ABN Amro in London. „Spending has come in stronger than expected and that's likely to continue.” The economy grew an annual 3% in the Q4, the fastest pace in more than two years, fueled by consumer spending and investment. Unemployment dropped to the lowest in more than a year in February.
The Debt Management Office, which oversees debt sales, will release details of funding needs after Brown's budget speech. It may skew issuance toward bonds with maturities of longer than 15 years and index-linked debt to keep funding costs low and meet demand from pension funds and insurance companies. Yields on 30-year bonds fell to 4.3% today from about 4.97% in late 2003. It's cheaper for the UK to borrow with 30-year securities than 10-year notes, which yield 4.82%, because of the demand from funds.
The so-called inverted yield curve, where the government pays less on longer maturity debt than on shorter-dated notes, won't likely be reversed this year, said John Wraith, head of interest-rate strategy at Royal Bank of Scotland. „We find it hard to see a way for the DMO to meet demands of investors to provide yet more supply to the long and index-linked sectors,” he said. „We would expect no let-up in the powerful curve inversion pressures.” Wraith predicts gross gilt issuance next fiscal year of £60 billion, with £40 billion allocated to long-dated and index-linked bonds, compared with 42.50 billion this year. Treasury minister Ed Balls said last week that the UK will favor sales of long-dated and index-linked gilts in the „medium term,” given demand from institutional investors. The government sold £25.3 billion of longer-dated bonds this fiscal year, increasing as a proportion of the total to 40% in the current year from 22% in 2003-2004.
The UK, Europe's fourth-biggest borrower, has sold 40-year and 50-year bonds in the past two years to meet demand among pension funds and life insurers for securities that match their future payments as policyholders live longer on average. The DMO sold 50-year inflation-linked gilts for the first time in 2005. Redemptions of bonds are estimated by the DMO at £29 billion in the fiscal year starting April, compared with £29.9 billion in the current year. (Bloomberg)