Before this year, Dan Boardman-Weston hadn’t bought UK government bonds in more than a decade. Now yields close to 4% are putting short-dated gilts on his radar.
(Bloomberg) —
Before this year, Dan Boardman-Weston hadn’t bought UK government bonds in more than a decade. Now yields close to 4% are putting short-dated gilts on his radar.
New investors like Boardman-Weston, who runs BRI Wealth Management, are a boon for Chancellor Jeremy Hunt. He’s expected to focus the UK government’s bond sales on closer maturities when he unveils the Spring Budget this week.
According to a Bloomberg survey, bonds due in seven years or less will account for almost 40% of the Treasury’s borrowing, compared with a historical average of 27%.
“We do still have an amount of cash on clients’ portfolios because we are nervous on markets generally,” said Boardman-Weston, chief executive and chief investment officer at BRI.
After buying eight- and nine-year gilt maturities for his clients earlier this year, “we’re considering whether to allocate some of that to the short end of the curve,” he said. Based near Coventry, BRI has about £550 million ($663 million) under management.
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Though smaller than initially feared — thanks to a rosier economic outlook and improvement in public finances — the wall of issuance is still daunting.
Swelled with funds to get households and firms through the cost-of-living crisis, the borrowing target will clock in at £233 billion in the coming fiscal year, according to the median prediction in the poll of 15 banks.
The task of the Debt Management Office, which runs the gilt sales, has also been made trickier by the Bank of England withdrawing stimulus as it shifts from being a buyer to a seller of bonds. The central bank is now unwinding debt purchases at a pace of £80 billion per year.
According to the Bloomberg survey, just 21% of issuance is forecast to be long-dated, compared with a historical average of 30%. That may reflect lingering damage from the gilt meltdown in September, when pension funds were forced to unload long-dated bonds following the disastrous mini-budget under then-Prime Minister Liz Truss.
“After the LDI pension-fund crisis we had in the autumn, people are nervous about the DMO issuing too many longs,” said Ben Nicholl, fund manager at Royal London Asset Management. “Hence why they think they should shift some to shorter maturities.”
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The DMO will publish the official fundraising goal on March 15, when Hunt sets out the country’s annual tax-and-spending plans. Forecasts for gross gilt issuance in the Bloomberg survey ranged from £166.5 billion to £260 billion.
RLAM’s Nicholl pointed out that greater short-dated supply isn’t necessarily a magic wand, however, and a bond-auction metric last week implied weak demand for 2025 gilts.
In a recent consultation with the debt agency, some investors advised it to raise more funds from retail investors to ease pressure on the gilt market and limit the volume of bonds hitting the market.
Tapping the National Savings & Investments program, which targets household savings, could offer “strength through diversity,” and help the Treasury meet its challenging target, according to Bank of America.
The US bank’s strategists envisage as much as £45 billion raised via the NS&I, three times the median estimate. They concede it’s a “bold call,” but point to repeated interest-rate increases on NS&I savings accounts since December as “a clear signal” of intent.
Treasury bills, which mature in 12 months and less, could also ease some of the pressure. Net issuance of the short-dated notes, which currently make up just 1.7% of the UK’s debt portfolio, could reach £16.5 billion, according to the Bloomberg survey.
And the DMO may also benefit from the Bank of England nearing the end of its hiking cycle. The key rate stands at 4% and more dovish members of the Monetary Policy Committee are already pushing for a pause, which would spur a recovery in bonds.
“The BOE will potentially be one of the first to stop hiking and potentially one of the first to reverse,” said Charles Diebel, head of fixed income at Mediolanum International Funds Ltd. “The gilt curve offers value.”
Already traders say they’re seeing gilt buyers like BRI’s Boardman-Weston, who haven’t been around for years, lured back by a jump in yields.
The two-year gilt yield traded just shy of 3.90% on Wednesday, triple the level it was at a year ago. It fell back to 3.64% amid a global bond rally on Friday.
“For the last 10 or 12 years, there has been no gilt that will give you a running yield of 4% or so, but now there is,” Boardman-Weston said. “We can start using gilts for clients to meet their underlying needs.”
–With assistance from Sujata Rao.
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