Exclusive: Transcript: Interview with UK DMO CEO Sir Robert Stheeman

2 May 2024

By Aurėja Bobelytė – VILNIUS (Econostream) - Following is the full transcript of the interview conducted by Econostream on 29 April 2024 with Sir Robert Stheeman, Chief Executive Officer of the UK Debt Management Office:

Q: Some concerns have risen recently that the UK will face a failed auction. How do you assess these concerns? Would it have any major implications for you?

A: We periodically get asked about this, but I haven’t come across any particular concern from market participants about so called “failed auctions”, which should more properly be described as uncovered auctions.

I regard the prospect of an uncovered auction with equanimity. An uncovered auction can happen from time-to-time due to specific circumstances at the point when the sale closes but this is not indicative of a general change in the ability of the DMO to raise money for government through bond issuance. An uncovered gilt auction merely reflects the balance of demand and supply for the specific bond on sale at the specific time of the closing of the auction. It should not, therefore, be taken out of context. The UK DMO is a repeat borrower, at all points of the year and in all market conditions. We believe that underlying demand for UK government debt remains strong.

Q: Are you worried about the shift in demand for long-dated gilts? What implications it might have in the long-term?

A: In short, no. Over time the composition of the investor base is unlikely to remain static. We expect pension funds and insurance companies (who traditionally represent the core investor base for long dated gilts) to remain a very important sector of the investor base for us and we anticipate that underlying demand for long-dated gilts will remain strong, in both conventional and index-linked format. We are very much aware, however, of the growth in pension scheme buyouts by insurance companies and the potential for this to impact demand for longer dated gilts over a longer time frame, given that insurers tend to have lower allocations to gilts than the pension funds themselves. This structural shift in demand was a discussion point at our annual consultation meetings in January 2024.

We continue to foster as diversified an investor base as possible in order to ensure that the government continues to have access to cost-effective financing in all market conditions. Taking this approach has helped (and will continue to help) ensure that, if one part of the investor base were to reduce its demand for gilts, this would not inhibit the ability of the DMO to continue to fund the government.

Q: What can be expected going forward in terms of green issuance? Why has more progress in this respect not been attempted? What argued for re-opening existing issuance and against building the curve?

A: We are now in the fourth year of the green financing programme – and it is regarded as a well established component of the remit. Green gilt issuance of £10.0 billion (cash) is planned in 2024-2025. In terms of issuance strategy, we are currently planning to continue building up the sizes of the two existing green gilts in 2024-2025, whilst monitoring market conditions and retaining the possibility of launching a new maturity point on the green yield curve. I would like to point out that our approach reflects market feedback which suggests that investors would like to see a similar level of liquidity in green gilts as observed in standard conventional gilts, so that they trade similarly. This should also support the overall value for money of the programme.

From the outset our commitment was to make green gilts as ‘gilt like’ as possible – hence, to the extent feasible based on total green spending, we want to build the green gilts up in size to encourage liquidity and trading in these bonds. I personally believe that we have been successful in achieving this.

Q: Where do you see the average maturity of the portfolio heading? Do you have a numerical target or expectation?

A: I would like to note that the DMO does not and has never had a numerical target or expectation with respect to the average maturity of the gilt portfolio or the average maturity of the debt portfolio as a whole. However, it is worth noting that the UK Government historically has pursued a policy of issuing relatively more longer-dated debt than other G7 countries, primarily in response to structural demand from our core investor base. This has meant that the UK has by far the longest average maturity in the G7. There have been benefits to following this approach including, amongst other things, managing refinancing risk.

Q: Have you been satisfied with the issuance of gilts via auctions so far?

A: It may not be a surprise to you if I say that I don’t focus on any single auction result as a general indicator about the deliverability of the auction programme. However, from a high level perspective, I am pleased to say that our auctions have been very strongly supported by the market (as have our syndications). Cover ratios, which are just one measure of demand at auction, have recently been at record high. However, we are never complacent about the gilt market’s ability to take down our debt.

Q: Some concerns have been floating around about the ageing IT systems and your upcoming departure from the DMO, as this poses risks in the UK’s ability to borrow money in a time of heavy borrowing. How would you address these concerns?

A: I am slightly puzzled by this notion as it has not been suggested to me that our IT systems are particularly at risk of being overly antiquated. At the same time, I can assure you that IT resilience is something that we are very mindful about. We continually review our IT infrastructure and system set up and make changes as required. We recognise the need for constant investment in systems and technology as is the case with any organisation that operates in the wholesale financial markets. As far as my own departure is concerned I am pleased to say that the name of my successor is now known and Jessica Pulay’s appointment sends a strong signal about the importance of continuity both internally, for the wider gilt market and the Treasury. Jessica has huge experience in fixed income markets and her appointment is particularly important in a year of record issuance for the DMO and net supply to the market. It sends a key message that it's ‘business as usual’.

Q: Do you have any plans to offer incentivised Gilt retail bonds?

A: The short answer is that the government currently has no plans to offer incentivised gilt retail bonds. However, I think some context to this is really important. Firstly, the gilt market investor base is predominantly wholesale, making up 99.99% in value terms. Secondly, most retail investors buy and sell gilts in the secondary market through existing private sector solutions – with a choice from a variety of service providers. This includes banks, specially designated retail GEMMs (currently Winterflood Securities, Toronto Dominion and Bank of Montreal), brokers and other financial intermediaries. We welcome increased retail participation in the gilt market, but it is the channels I have listed which have effectively serviced the reportedly marked increase in retail activity in gilts recently.

Q: We have seen reports that the UK is exploring options to increase the contribution of retail investors to meet financing requirements. Do you have any plans to offer a program of issuance incentivised to target retail investors? If so, any idea what such incentives might look like – could it be similar to the Italian BTP Valore?

A: The DMO along with our colleagues in HM Treasury, continue to monitor and keep under review how retail investors are able to access the gilt market, both at primary issuance and via the secondary market. From the DMO’s perspective, any diversification of the gilt market investor base is to be welcomed. We also welcome any market-led initiatives that facilitate greater access to gilts. As you may be aware, Winterflood Securities (one of our retail GEMMs) have recently launched a new facility that allows retail investors to purchase new issue gilts through retail platforms. In my opinion, this demonstrates admirably the flexibility built into our primary dealer system under which GEMMs provide a full range of services and support to their clients, adapting as appropriate to the evolving nature of their clients’ interest.

Q: Looking ahead, what are the key risks and challenges for the UK's debt issuance program, particularly in the context of evolving market dynamics and economic uncertainties?

A: Personally, I think a key challenge for the DMO will be in maintaining the liquidity and stability of the gilt market. The gilt remits that the DMO needs to deliver in the coming years are likely to remain at elevated levels. The DMO has a really good track record in successfully delivering its remit in all types of market conditions and backdrops, but it is essential that the market functions well and remains resilient. It is also a good time to mention our Primary Dealers – the GEMMs – who act as intermediaries between ourselves and the wider market. The GEMMs are an essential part of the gilt delivery mechanism and a healthy GEMM model is crucial in ensuring a liquid market. In this context, I welcome the fact that daily turnover in the gilt market in 2023-24 was, at £39.2 billion, £4.6 billion (13.3%) higher than in 2022-23. Coming back to my liquidity point, it is also necessary that we continue to set remits that help to support market liquidity, through issuing across a wide range of maturities appealing to a diverse investor base. The design of these remits need to take into account operational delivery, and it is important that we continue to work with market participants to target those areas where demand is particularly strong, the so-called “preferred habitats” for investors, whilst also remaining predictable and transparent in our approach. Finally, and by no mean least, the DMO is made up of colleagues with a great mix of specialist skills and experience. They have been and remain the key to our success.