LONDON (Reuters) - Britain’s improving public finances are likely to lead to a cut in bond sales this fiscal year but gilt issuance probably won’t fall anything like as fast as the country’s overall financing needs.
A Reuters poll, ahead of the government’s half-yearly budget update on December 5, showed most primary dealers expect Britain to reduce sales of short-dated Treasury bills more than it will ease off on selling longer-dated government bonds.
“We think the overall borrowing requirement will come down by 21 billion pounds, but that only 4 billion of that will come off gilts,” said John Wraith, fixed income strategist at Bank of America Merrill Lynch.
“The Debt Management Office used the stock of Treasury bills as a balancing item last year, and they are likely to do so again.”
Surprisingly strong economic growth and a boost to public coffers from the sale of shares in bank Lloyds (LLOY.L) and postal operator Royal Mail (RMG.L) means Britain’s public finances are looking a lot healthier now than the government expected in March when it announced its annual budget.
The Reuters poll showed a median forecast for gilt issuance the current fiscal year - which runs from April 1 to March 30 - of 152.5 billion pounds.
That would represent a fall of just over 3 billion pounds from the previous projection of 155.7 billion pounds and a drop of more than 12 billion pounds from last year’s issuance total.
The British government has resorted to massive sales of debt to offset the impact of a deep recession which forced it to pump billions of pounds into some of the country’s biggest banks and spend more on welfare payments.
The budget deficit has narrowed from more than 10 percent of gross domestic product at the time of the last election in 2010. But at about 7 percent of GDP, it remains one of the biggest among advanced economies.
Simon Peck at RBS expected a 16 billion-pound reduction in the financing requirement this fiscal year, and predicted this will be evenly split between gilts and Treasury bills.
Others think almost all of the adjustment will come through lower Treasury bill issuance and some, including Citigroup, JP Morgan and Royal Bank of Canada, are predicting no revision to gilt sales at all.
Britain’s borrowing needs are expected to fall further in fiscal 2014/15 but rising gilt redemptions - which total 51.5 billion pounds this year and 62 billion pounds next year - mean gilts issuance is likely to stay little changed.