UK gilt issuance is set to double in 2003 after Chancellor Gordon Brown announced cuts in economic g...
UK gilt issuance is set to double in 2003 after Chancellor Gordon Brown announced cuts in economic growth forecasts meant he would need to borrow to make up the shortfall between declining tax receipts and increases in public spending commitments.
The news has concerned bond watchers, who fear a flood of supply will weaken prices of the paper they are already holding.
Further bearish news for UK bonds was Brown's announcement that hawkish deputy governor Mervyn King will succeed Eddie George as governor of the Bank of England next June.
King's vigilant attitude to stamping out inflation could usher in an era of rising interest rates once he takes the helm.
The public sector net borrowing requirement, the borrowing figure economists focus on, is forecast to be £20bn for 2002/03 and £24bn for 2003/04, up from the Government's earlier forecasts of £11bn and £13bn respectively. This is well ahead of market expectations.
Analysts say gilt issuance including redemption rollovers could exceed £50bn next year, compared to an estimated £26.2bn for 2002. The deficit measure the Government uses to calculate funding, the Central Government Net Cash Requirement, is also expected to rise from the forecast £17.8bn to £30.2bn.
'The question is how high yields will have to rise to absorb this or whether they will have to rise at all,' says Merrill Lynch senior fixed income strategist Andrew Roberts.
'There is an argument that the market will come to meet the extra issuance.'
It is still unknown where the issuance will appear on the yield curve and how much of the extra funding will come from non-gilt sources.
'All else being equal, we are going to have a deluge of funding next year,' Roberts says.
Brown blamed the global economic slowdown for eroding taxation and revised down his own growth predictions, saying GDP would rise just 1.6% this year against his earlier budget forecast of 2%-2.5%.
He forecasts that the economy will grow by 2.5%-3% next year, down from the previous forecast of 3%-3.5%.
Offshore influences are also looking bad for bonds, with the latest figures released in the US showing rises in consumer spending and confidence, as well as a rebound in manufacturing and a slowdown in unemployment growth.
But while a stronger global economy led by the US could boost the UK economy and tax revenues, and thereby cut the need for gilt issuance, Roberts said, the Government's figures are already based on robust economic forecasts.
'Higher growth rates would certainly cut the deficit but the Government is forecasting growth of 2.5%-3% for next year, so these numbers are still formulated on the basis of a strong growth forecast,' he says. 'There isn't much room for manoeuvre.'
However, Roberts believes the overall direction of the gilt market will continue to be dictated by the global economic environment.
Income tax and VAT still reasonably healthy.
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Economic outlook far from dire.
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