UK’s ‘More Ambitious’ Debt Office Gives Some Respite to Reeves

(Bloomberg) -- UK Chancellor of the Exchequer Rachel Reeves likely owes some gratitude to her debt office, which was lauded by analysts for its approach to lowering borrowing costs.

Markets were jittery as Reeves laid our her fiscal plans on Wednesday, with bond yields edging higher. But as she wrapped up her statement and the Debt Management Office unveiled how it would fund the measures, long-term borrowing costs sank more than 10 basis points, sidestepping the gilt selloff headlines that followed Reeves’ October budget.

The DMO, which operates with a staff of around 130 in a separate office from Reeves’ Treasury, surprised investors by tilting bond sales away from long-maturity bonds more aggressively than any bank surveyed by Bloomberg anticipated. It’s a shift both dealers and investors had been calling for, as appetite for such debt from pension funds dwindles. 

Analysts at Bank of America Corp. — among the most vocal for a change in issuance strategy ahead of the event — described the DMO’s plan as “positive and more ambitious.”

While gilts gave back much of Wednesday’s gains the following day as investors turned their attention to the country’s still-fragile finances, investors and strategists broadly praised the DMO for making the upcoming bond supply easier to swallow. 

The DMO, which is led by chief executive Jessica Pulay, cut the proportion of proposed long-dated sales to 13.4%, compared with 18.5% in the equivalent announcement a year ago. That’s the smallest proportion in a Spring statement in the DMO’s 27-year history. 

The shift accelerated a trend of the past years, as the DMO adjusts to waning demand from defined-benefit pension funds, which have traditionally propped up the market with near-insatiable buying. While the market expected that strategy to persist, the office exceeded all expectations.

“The DMO contributed to market stability,” said Orla Garvey, a portfolio manager at Federated Hermes, citing the tilt shorter in issuance. 

The debt office is responsible for funding the government’s fiscal plans in a way that minimizes financing costs over the long term. That task has been made more challenging amid a global surge higher in bond yields since the pandemic and increasing financing requirements. What’s more, the Bank of England is no longer supporting the market with bond purchases and is instead winding down its portfolio.

The DMO also said it will conduct regular sales of so-called off-the-run bonds after investors requested more such operations due to their relative scarcity. Until now, the debt agency has only done this on an ad-hoc basis to meet market demand. 

It was Pulay’s first Spring remit since taking over in July from Robert Stheeman, who helmed the DMO for over two decades. She has previously been co-head of policy and markets. 

“The DMO saved the day,” said Gregoire Pesques, CIO for global fixed income and head of aggregate strategies at Amundi, referring to Wednesday’s market moves. “Investors are nervous and need to be convinced about the value and quality of UK gilts.”

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