Low and volatile gilt yields in the final quarter of fiscal 2005-6 have forced the government to announce new rules giving additional flexibility to the Debt Management Office in determining when it will issue debt.
Out of the 2006-7 tax year target of raising £63bn gross in new cash for the government, some £10bn is being withheld on the basis it may be issued on a supplementary basis from quarter to quarter through the year.
“The remaining unallocated amount of £10.0 billion will be allocated on a quarterly basis throughout the year in a broadly even-flow manner (i.e. approximately £2.5 billion will be allocated each quarter),” the Treasury states in additional notes to today’s budget.
“This is intended to increase the ability of the Government to respond to substantial changes in market conditions and in the pattern of demand for gilts throughout the year. The allocation in the first quarter of the financial year is announced as part of the publication of the DMO’s annual remit. From the second quarter of the financial year, decisions on the allocation of these supplementary amounts of issuance will be made following regular consultation meetings with Gilt-edged Market Makers (GEMMs) and representatives of investors.”
Another important area of suggested rule changes has been put on hold, as the Treasury says it needs more time to consult on proposals to replace issuance of debt through paper certificates, so-called dematerialization.
The general idea is that by replacing paper, the DMO’s processes become more efficient. Phase one of the change has already taken place, with the institution of Computershare Investor Services becoming the registrar of gilts in December 2004.
However, the Treasury now sees the best efficiencies coming if the dematerialization of the gilt market is matched by similar moves in the equities market. This means the DMO will have to wait until a process for equities dematerialisation is agreed. A consultation document on equities dematerialisation is being prepared with guidance from the Institute of Chartered Secretaries and Administrators.
Elsewise, Market changes have already persuaded the government to set aside more of its paper in so-called super-long dated form, i.e, 50-year gilts.
Issuance of the £53bn in pre-allocated debt will otherwise proceed in line with a list of published auction dates, with a minimum of 17 auctions planned through the tax year.
At least four auctions will cover short-term (1-7 years) debt, and aim to raise at least £10bn in cash. Four auctions will cover the medium term (7-15 years), again seeking £10bn, while nine auctions will cover the long-end part of the market, looking for £19.5bn in cash.
Further to debt issued to the wholesale market via gilts, the retail market will be tapped for a net £3bn, according to forecasts for business by National Savings & Investments.
The executive agency of the Treasury will aim for internet sales of at least £1.3bn – as these already account for some 4% of its sales.
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