Two of the market’s most interesting rumours concern the UK Debt Management Office’s plans for future issuance. First, the DMO is said to be considering a syndication rather than an auction for its 50-year inflation-linked bond in September.
The first 2055 gilt auction in May was covered 1.6 times, but index funds didn’t buy as expected and banks had to unwind their long positions. Icap fixed-income strategist Don Smith predicted that July’s £2.25 billion ($3.9 billion) tap would be covered between 1.2 and 1.5 times. In the event it struggled to a meagre 1.23 times. Smith points out that the 2055 carries premium because of its low yield relative to the gilt curve. That shows that there is demand for 50-year bonds among buy-and-hold investors, and yet they sat on their hands. Syndication of the 50-year linker in September seems a sure bet, especially if the DMO wants to be sure of uncovering demand from life insurers and pension funds.
Less expected is the hot rumour that if the UK’s cash requirement continues to grow at its present rate, foreign currency issuance is highly likely. Any non-sterling issue instantly triggers talk of the UK’s legendary June 2003 dollar deal. The $3 billion, five-year Eurobond priced seven basis points through the curve. But if the UK government can save its taxpayers £8 million, as it did two years ago, shouldn’t it borrow in dollars a couple of times a year, not a couple of times a decade?
Dollar deals aren’t always easy, of course. Germany’s inaugural landmark deal in May suffered from the general market volatility. And it’s always the newest issues that get shorted to hedge existing positions because they’re the most liquid.
So rarity and timing are important, but not as important as the UK DMO likes to say they are. As one of the best credits in the world, the UK can always fund close to US treasuries. It would be relatively easy for it to borrow in dollars, swap back to sterling, and save money.
The UK shouldn’t restrict itself to doing non-sterling deals just to manage its foreign exchange reserves. There should be no false patriotism over whether it is appropriate to finance in the budget outside the domestic currency, and with no political requirement to support the euro, it should be bold. The UK should do more dollar deals, more often.
