UK’s financial future brightened with an investor comeback

Expectations that the government’s ambitious bond sale plan will prosper are fueling a glimmer of hope over the UK’s public finances and the return of long-absent debt investors. 

Even skeptical overseas investors and multi-asset funds are unable to dismiss the yields on sovereign notes. Promising public finances data and a more optimistic economic outlook suggest the UK Treasury will announce a more modest issuance strategy on March 15 than forecast. 

Citigroup Inc reduced its assessment by over £50 billion ($60 billion). However, it indicated that a quarter of a trillion pounds of supply in the following fiscal year will still represent a 50% increase from this year when sales and prior purchases from the Bank of England are taken into account.

The UK’s Debt Management Office will have to be agile and flexible. It has to cater to areas of the curve where there is the highest demand, investors and traders believe.

According to Gustard, the only investors interested in gilts during quantitative easing were those who had mandates for bonds or required them to obey investment guidelines. That is shifting as bets increase, and inflation is about to peak. Moreover, central bank tightening is likely to reach its end soon. According to data gathered by Bloomberg Intelligence, flows into exchange-traded funds that specialize in European bonds reached a record €5 billion in January.

In a letter to clients, Barclays analyst Moyeen Isla wrote that the UK government’s unexpected budget surplus should result in a £16 billion drop in the Treasury’s bond-sale plan. However, the outcome will also depend on the economic projections of the fiscal watchdog.

Warnings and recommendations from the specialists

Theo Chapsalis is a rates strategist at Morgan Stanley. According to him, the DMO will still need to steer its program more toward medium and short maturity. This is despite the curbed plan. They are favored among foreign investors because they are less exposed to interest-rate risk. Several investors also recommended to the debt agency, in a recent consultation, that it raise additional money from individual investors. They think this will reduce the number of bonds released onto the market.

Daniela Russell is an HSBC Holdings Plc analyst. She advises purchasing 30-year gilts on an asset-swap basis if the supply of longer-maturity bonds is lower than anticipated.

RBC Capital Markets believes that the government could gather as much as £15 billion from individual investors during the upcoming fiscal year. However, strategists warn that acquiring much more could result in accusations of impeding commercial offerings.

Inflationary pressures mostly stem from uncertainty among investors towards the UK. Five-year inflation swaps in sterling mean a headline inflation rate of about 3% in the UK vs 2.6% in the eurozone.

According to forecasts by Pictet, the second half of the year’s anticipated economic downturn will soften price pressures. Perhaps, it will allow 10-year gilt rates to fall more than 30 basis points to 3.3% by year’s end.