22 June 2022

UK Debt Office gilt syndication: a worrying outcome for the UK market

5 min read

Ben Nicholl, fund manager at Royal London Asset Management, comments on the UK Debt Office’s gilt syndication announcement:

“Make no mistake about it, yesterday’s UK syndication of nominal 2073 maturity bonds, the longest gilt in issue, was not a good outcome for the UK market, the debt management office, or the UK taxpayer.

“As the market opened, expectations were for a deal size worth around £4bn. Just a few hours later, once deal books had shut, the UK Debt Management office announced they would only be looking to raise around £3.3bn. Quite simply, despite the significant rise in long dated yields over recent months, there is simply not enough demand from the market for such a long maturity asset.

“To put the year to date move into context, the bond was first issued in February this year at a price of 93.89p. Today the bond was issued at a price of 57.63p. The result has seen gilt curves steepen, and the UK market underperform global peers; a trend that may continue for the foreseeable future. With the economic picture deteriorating, and the UK government under increasing pressure to cut taxes and provide support to business and consumers, the outlook for UK bond supply looks set to worsen.

“Back in March, the amount of gilts that the UK Debt Management Office expects to issue this year to finance government borrowing requirements was lower than the market expected, surprising to the downside – the market had expected £145bn but it came in at £125bn. Few market participants would be surprised to see the gross number balloon higher as the year progresses.

“Add to that the central bank being criticised for being behind the curve and in denial about the inflationary challenges ahead, and one wonders who will be around to buy all the gilt supply to come. At the very least, investors should be asking the question; how high do bond yields need to rise to attract investor appetite?

“With inflation climbing towards 11%, interest rates rising, dwindling central bank credibility, and deteriorating market liquidity, it feels as if it needs to be higher than 2.5%.”

 

About Royal London Asset Management (RLAM):

Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.

RLAM manages £164 billion of assets and employs 129 investment professionals as at 31 December 2021. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.

For professional clients only, not suitable for retail investors.

Issued by Royal London Asset Management Limited, registered in England and Wales number 2244297; authorised and regulated by the Financial Conduct Authority. Registered Office: 55 Gracechurch Street, London, EC3V 0RL.

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