MNI INTERVIEW: Short Gilt Shift On Cost And Risk Analysis -DMO

Cost-and-risk analysis drove the UK Debt Management Office’s shift to shorter-dated bonds in its 2025/26 remit, a senior official told MNI on Thursday.

“There is an important shift in the sectoral proportions this year, and this reflects the DMO’s analysis of cost and risk, whilst also taking into account market feedback on declining structural demand for long-dated gilts,” DMO CEO Jessica Pulay told MNI.

The DMO will sell almost GBP111 billion of short-dated gilts in the upcoming fiscal year, equating to 37.1% of total sales, helping meet investors' "variety of preferred habitats across the maturity spectrum.” Short-dated sales totalled 30.6% in 2024/25.

In addition to issuance cost and risk, and the reduction in long-end demand, Pulay said another advantage of short-dated sales was that they “can be sized larger in absolute terms than longer-dated gilts, given the duration risk.” 

This “allows the market to absorb greater auction sizes given the duration risk of our shorter operations relative to our longer operations.” (see MNI INTERVIEW: Gilt Hit Weighs On Inflation - Ex-BOE Saunders )

INNOVATIVE ADAPTATION

The DMO will also assign a larger unallocated block in its remits, with more flexibility over where on the curve this can be issued, she said. 

“We’re significantly increasing the size of the initially unallocated portion of issuance. This year, 9.2% of the total issuance, or GBP27.5 billion in terms of the total amount.”

This shift came after market feedback “about the importance of greater flexibility in terms of delivering the financing remit in 25/26 in order to adapt to changing, or potentially changing, I should say, patterns of demand and market conditions in a smooth and efficient way,” Pulay noted.

This will allow the DMO to “make use of gilt tenders in a more programmatic way -- we're calling them programmatic tenders -- throughout the financial year, and we foresee this as being a mechanism to issuing off-the-run gilts, namely gilts that are not currently being built up to benchmark size through our regular program of auctions.”

Pulay stressed that debt managers will still use quarterly consultations with investors “as a step in gathering views on the proposed scheduling of these programmatic tenders, including on the relevant sector. And then ahead of each specific tender, we will be engaging with the market again, consulting on the specific choice that we're going to be issuing on that tender date.”

The move to programmatic tenders does not mean that the DMO “will not have scope for ad hoc tenders, as we currently do for market management processes,” she said.

“The most important point to underscore about the programmatic tender approach is its flexibility to respond to market demand,” Pulay said. 

"We have been successful this year in meeting market demand for specific bonds through ad hoc gilt auctions. Now we have two different tools, including these more regular, programmatic tenders as well as ad hoc tenders in order to meet that demand.”  (see MNI POLICY: BOE Seeks Low Key QT, No Sharp Pace Change Likely )

GREEN GILT SALES CONTINUE

Pulay confirmed the government’s ongoing commitment to green debt, with unchanged issuance to meet continued demand.

“On our very important green gilt program, this year we are again going to be issuing GBP10 billion,” she said. “I think it's important to note the ongoing commitment to that programme from government, which now totals GBP46 billion since the inception of that programme back in 2021.”