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Opinion

Why non-sterling borrowing could be good for the gilt

There should be no false patriotism over whether it is appropriate to finance outside the domestic currency

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.

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