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Monopoly: UK Treasury market is resilient despite ‘major price corrections’, says Debt Commissioner.

Monopoly: UK Treasury market is resilient despite ‘major price corrections’, says Debt Commissioner.

 


LONDON, October 4 (Reuters) – UK bond market is undergoing “massive rebalancing” but comfortably absorbs £62 billion ($69 billion) of additional debt announced after Treasury Secretary Kwasi Kwarteng’s September 23 mini-budget will do The UK Debt Management Office (DMO) said Monday.

Robert Steeman, tasked with overseeing the £2.1 trillion UK government bond market, said in March 2020, at the beginning of the COVID-19 pandemic, amid high volatility over the past 10 days and the involvement of the Bank of England (BoE) as well. I saw similarities between them. To calm the market.

But Steeman told Reuters that the overall situation recently felt different because bond dealers were generally able to continue to trade better “despite a very difficult situation”.

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The 10-year UK Treasury bond fell in September, its worst since at least 1957. Other major central banks, as concerns over Kwarteng’s unfunded £45 billion tax cuts added to fears of a sharp rate hike by the Bank of England (BoE).

The 10-year yield reached 4.582% on September 28, the highest since 2008, a 70 basis point increase from before Kwarteng’s mini-budget. On Monday it was less than 4%.

“The Gilts and other Treasury markets all need some major revaluation,” Steeman said.

“There is too much uncertainty in terms of the fiscal situation as well as the potential monetary policy response. This is what causes a very large part of the market volatility,” he added.

DMO has increased its funding target for 2022/23 after Kwarteng’s mini-budget from £72 billion to £234 billion.

“I’m confident it can be digested reasonably well,” Steeman said.

UK Treasury prices rose Monday after Kwarteng announced a U-turn on one of his key moves, saying he would not repeal the top tax rate paid by the top 1% of earners.

But Steeman said the market is more focused on the government’s broader fiscal stance and how this will affect the speed at which the BoE raises rates.

The BoE’s chief economist, Huw Pill, warned last week that the BOE will have to make a major cut in interest rates on November 3, when it is due to make a policy decision. The next day, the BoE bought billions of pounds of 20- and 30-year bonds to prevent the market from falling.

His wife is on the BoE committee involved in the decision, he said, and the central bank’s announcement of the purchase was a “significant surprise” in the midst of DMO work to sell off £4.5 billion of government debt.

The timing of the announcement may have made life more difficult for bond dealers, but Steeman said its unexpected character underscored the BoE’s independence.

Cliffs for GILTS?

The BoE said it will stop buying bonds from October 14, a period long enough for pension funds hit by falling bond prices to normalize housing, and plans to resume the postponed Friday-Saturday sale program from October 31.

When asked if he was concerned about these potential cliff edges, Steeman said: “I am not overly concerned. Due to the nature of the markets in which we operate, there is always the potential for uncertainty, and this certainly applies today.”

He added that he could never rule out failed auctions where the DMO could not raise the desired amount on a given date. The last was in 2009.

Most of the increase in debt issuance over the rest of the financial year will come from short- and medium-term debt. Steeman said this reflects greater liquidity in that part of the market.

The wide bid offer spread for sows, which was around 10 basis points versus two-year notes on Monday, hopes to narrow as market volatility declines, according to Tradeweb data, Steeman said.

Regulators also need to look at how the pension industry’s responsible investment (LDI) funds use derivatives.

($1 = 0.8929 pounds)

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Reported by David Milliken and edited by Mark Potter

Our Standard: The Thomson Reuters Trust Principle.

Sources

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2/ https://www.reuters.com/markets/europe/exclusive-uk-gilt-market-resilient-despite-major-repricing-debt-office-head-2022-10-04/

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