Unprecedented drama
In the aftermath of the calamitous so-called mini-budget from the now ousted Liz Truss government, the UK Debt Management Office’s £4.5bn tap of the July 2053 green Gilt in late September priced through some of the worst conditions possible.
The deal, which had already been delayed by the Queen’s death, was progressing smoothly enough on September 28 when suddenly, in mid-execution, the Bank of England made the bombshell announcement that it would temporarily intervene in a Gilt market that was in meltdown. That the DMO still managed to get the deal done despite a huge move in market prices following the Bank’s statement without a single investor dropping from the book reaffirmed its reputation, if not necessarily the UK government’s.
Given how fraught the market was in the days ahead of the deal, one view was that the DMO should have delayed further. The Truss government’s series of unfunded tax cuts in the mini-budget had set off a rout in Gilt prices. The budget by then UK Chancellor Kwasi Kwarteng on September 23 had set off a vicious selling cycle – the yield on the 10-year Gilt jumped 120bp in a matter of days – and left certain pension funds struggling to post collateral for their LDI strategies. Therefore, a more sensible strategy, according to this view, would have been to wait for a more stable window. But that would be to misunderstand what sort of message a delay would have sent – that the UK had lost market access; a dire situation for any issuer, never mind one with huge borrowing needs.
With a ballooning remit to manage – now £72.4bn bigger thanks to the tax cuts – the DMO opened books on the tap as planned at 9am London time via Barclays, BNP Paribas, HSBC, JP Morgan and UBS. An hour later books closed with more than £30bn of orders and the allocation process began. And then, at 11am, came the BoE announcement, which led to a 75bp rally in yields.
And yet the £4.5bn tap still priced in line with the terms that had been set before the BoE's announcement, at 1bp over the 3.75% July 2052 Gilt. Proceeds totalled £2.4bn given the line's discounted secondary market price.
DMO chief executive Robert Stheeman was matter of fact in his description of the day’s events. He told IFR at the time: “Today’s transaction took place against a highly volatile market backdrop, so it is all the more pleasing that it has been well received by the market.”
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