Debt Management Office

They're pretending that they're still doing QT.

And then the Treasury is just going to shorten the maturity, but do it under the name of the DMO.

So it looks like there's some independent body that's coming up with the same policy as Scott Besson.

It's not about an independent policy.

instead.

They're handing it over to the Treasury.

They're handing it over to DMO.

We've yet to find out what they'll do with it.

So bonds maturing after 2049 will no longer be sold on the open market.

And moreover, the sales that do happen will be, pending approval from the Treasury, will be bundled with standard DMO auctions.

So the Bank of England auctions and the the Treasury's auctions of fresh government debt are not in competition with one another.

Taken together, these measures were taken really quite well by markets after flirting with 6% earlier in the week.

They have not stopped quantitative tightening, but instead are materially redesigning how the gilt unwind will work.

The bank has paused Active Asset Purchase Facility, or APF, gilt auctions while it works with the Treasury and the DMO on a new structure, and it has also carved out £120 billion of long-dated gilts that will be retained against banknote issuance rather than sold back into the market.

The remaining monetary policy GILP portfolio will be reduced through a combination of £20 billion of annual active sales and maturities, equivalent to an average annual reduction of roughly £46 billion through 2034.

That means less mechanical, long-duration supply hitting the gilt market through active sales and greater flexibility around the government's broader funding profile.

It's probably a procedural thing.

But the fact that the Bank of England is planning to, rather than sell those bonds off into the market, to sell it to the Debt Management Office, which is another part of the government, similar, I think, to what they do in New Zealand.

But it's still an eyebrow-raising moment, isn't it? You've got one bit of the government selling to another bit of the government.

I would say all of that stuff, I wasn't surprised to see that the long end came off a little bit.

And that is what's known as the coupon on it.

The bonds are issued by the Debt Management Office, which is the official body that's responsible for raising the money that the government needs to borrow in order to keep the economy afloat, keep things functioning and invest for the future.

and the debt management office does exactly what it says on the tin it manages that debt it goes right we're going to raise a certain amount of money on long-dated bonds like 30 years maybe once some on 15 years we'll raise some on 10 we'll raise some on 5 we'll raise some on 2 we'll go shorter term and there's a different interest rate on all of those things because the longer you lend money for the less certain you are about what's going to happen over that period of time and And the enemy of your return on bonds, because you know what you're going to get if you buy a bond when it's issued, you know it will pay you 5% every single year until it matures.

The enemy of that return is inflation.

And the longer out you go, the more things that could happen to inflation.

Perhaps the even more important development is not the way that it's now skewing sales.

I think market expectations of a skew shorter in its sales have been set quite high but the much more interesting development is that it will or intends to sell these bonds now directly to the DMO rather than directly to the market.

So in some ways, this is the Bank of England announcing its own form of operation twist.

We don't have much detail on how this is going to work yet, but you have to assume that the intention of this is that the Bank of England will be able to sell those medium bonds out to 2049 to the DMO, and the DMO can fund those buybacks, if you like, in any way it chooses, which presumably also means funding them by issuing at the very front end of the curve, either by bills or very short-dated bonds.

There are quite a few positives to this.

I

It doesn't change the way that the indemnity works or how these losses are covered by the Treasury.

This isn't the Bank of England no longer realising any losses.

But that is, as well as talking to clients and, uh, and traders, it's meant, uh, talking to the UK authorities.

So I had pretty good relationships over the long term with the Treasury, with the Bank of England, and the Debt Management Office.

Wonderful.

Well, it is an absolute pleasure to have you on the show.

And so in effect, this is a switch to take longer maturity but less liquid bonds out of the system and replace them with shorter maturity bonds.

If we think about that in the context of what other Treasuries across the major economies, so the UK Debt Management Office, the DMO, is a good example of this.

At the end of last year, the DMO announced that they would be reducing the amount of 30-year bonds that they would be issuing to the market, and that did have some effect to lower the yield in the 30-year part of the curve, but only on a relative basis.

A little bit of a curve effect and a little bit of an effect to support 30-year yields lower against, say, swap rates.

[laughs] Um, Sarge makes an observation, "Four base rate rises will kill the secondary gilt market.

Force DMO to offer a new debt at unsustainable levels." That's the Debt Management Office.

"One positive effect, it'll force the Bank of England to slow the rate of QT." Well, I've already read that they're going to be talking about that already, quantitative tightening or unprinting money.

The current losses to the taxpayer have just topped 100 billion pounds.