EXCLUSIVE: UK DMO’s Stheeman: Prefer a Gradual Approach to Any Curve Extension

9 August 2021

By David Barwick – Frankfurt (Econostream) – The UK Debt Management Office prefers a gradual approach to any potential extension of its issuance curve, according to Sir Robert Stheeman, Chief Executive Officer of the DMO.

In an interview with Econostream on July 27, Stheeman said that the DMO had perceived some interest in a curve extension, but that it was a question of a very small extension if any, rather than a significant leap.

The DMO, he said, was hearing feedback according to which demand for index-linked Gilts following last November’s change in RPI methodology was still running well ahead of supply.

Asked for his view of the current desirability of issuing a 100-year bond, Stheeman said it was ‘not quite clear to me what that would actually offer us’ and that maturities of such length were associated with ‘greater uncertainty about the extent of demand.’

‘So, when it comes to any curve extension, we prefer to follow a more gradual approach’, he said.

Still, at least some appetite existed, he noted. ‘We have begun to detect some market interest in a curve extension, potentially later this financial year. But that curve extension, and the interest in it from the market, is very much incremental only. It’s not a question of jumping from 50 to 100 years, it might be going from 50 to 51, 52, 53, or such like.’

As to demand for long-end index-linked Gilts after the recent change in RPI-methodology, Stheeman said that the DMO was hearing feedback ‘that overall, demand for index-linked Gilts significantly outstrips supply, because investors use those bonds to match long-term liabilities, even after the reform of RPI.’

The currently elevated level of breakeven rates at the long end is consistent with ‘very strong demand for inflation protection, particularly amongst pension funds’, he said. The DMO is thus ‘open to hearing feedback from the market about the issuance of specific Gilts, including potentially a new ultra-long index-linked Gilt.’

‘It might well be’ worth issuing a new ultra-long-end linker in the current financial year, ‘but we will have to see, and we will have to listen very carefully to what our market sources tell us and our assessment of that market’, he said. ‘But I certainly don’t want to rule anything out.’

Stheeman described himself as ‘very confident’ about the robustness of appetite for Gilts at the DMO’s financing operations, with ‘no indications’ of any change in this regard. Neither was there any sign of a shift in demand away from longer-dated tenors, he said.

‘Our recent transactions have shown that demand for long-dated maturities remains very strong, even though yields have come down somewhat from where they were just a few months ago’, he said. ‘We see demand as very robust. I’m not worried about that at the moment.’

The DMO had not yet made a decision about either the maturities for green Gilts to be issued this financial year or the timing of any issues after the one in September, he said. The question of maturity for September issue would depend on market feedback, he said, in which context he noted the consultation meetings to take place on August 23.

The green Gilt would ‘not necessarily’ have the same maturity as a conventional Gilt in order to make the calculation of the green premium easier for investors, he said.

‘If the maturity happens to be very close to that of an existing Gilt, so be it’, he said. ‘But if we feel that there’s an opportunity to fill in a gap somewhere on the curve, to make the curve richer, to make the curve more meaningful, then that could be something that we decide to do as well. I’m pretty sure that whatever maturity we choose, the market will be able to calculate pretty easily what the value of that is.’