Robert Stheeman has the best job in the City of London. Or at least he did have until Friday, his last day as chief executive of the UK’s Debt Management Office.
That, at least, is his view after running the DMO for 21 years. He has enjoyed being involved in government and policy while "interacting directly" with financial markets. It has been a big, evolving role – the DMO has raised more than £3.1trn during his time in charge, and had to react quickly to unprecedented bumps such as the 2008 financial crisis, the Covid pandemic and the UK’s 2022 mini-budget crisis.
“I think I’ve got the most interesting job around,” Stheeman told IFR on Monday, understandably in relaxed mood days before bowing out. “If you are interested in finance, and markets, and bonds was my background, you couldn’t want for a better role or a better area to work in."
The DMO has two remits, and activity in both has soared in the last two decades. Its best known remit is as the issuer of UK government bonds, or Gilts. In 2003/04 it issued £50bn of Gilts and there were £293bn in issue; this year it will issue £277bn, and there are £2.5trn UK Gilts in issue, the latter an eight-fold increase in their nominal value.
The DMO’s less well known remit is for cash management. It effectively acts as the Treasury’s treasury and manages daily government cashflows, balancing tax receipts and other income against payments to the NHS, defence and everywhere else. That now averages about £7trn of money market flows annually.
“It’s not just the size of the market, which is infinitely bigger than when I started, but it is the depth of the market, the size of the flows and the liquidity in the market,” Stheeman said. “Trading volumes are absolute multiples of what they were, and that’s a good thing because our borrowing requirements are much larger than they used to be, so we need to have a deep and liquid market.”
Stheeman was in charge of 130 staff at the DMO and many are in daily contact with debt market bankers and syndication desks, investors including insurance firms, pensions and hedge funds and other market players to gauge appetite and trends in the market.
Stheeman switched from the “other side” in 2003, after 16 years at Deutsche Bank as a director in its DCM team.
“I thought I knew something about bond markets. It was quite sobering to come here,” he said, in reference to some of the quirks of the Gilt market – which are now less pronounced – and for the high quality of staff, which he said remains the case despite the potential to earn more at a bank.
The DMO's relationship with primary dealers – the Gilt-edged market makers, or GEMMs – is central to its operations. “The primary dealer system is of exceptional importance,” Stheeman said. “Over my 20 years, their significance has if anything grown dramatically.”
There are currently 18 GEMMs, but some banks have complained that stiffer regulatory requirements have made it costly and less attractive to be a primary dealer and incentives need to improve.
“We always keep our relationship with them under review and we occasionally tweak the rules if we think it’s needed,” Stheeman said.
There is talk that non-banks could move into the space and join the system.
“There is a lot of discussion about this,” Stheeman said. “Our rules don’t preclude non-banks, but our rules make clear that we expect every GEMM to support the market on an ongoing basis, and for that you need the commitment of risk capital beyond just the provision of a bid and offer price.”
He said the system is working well, adding: “I think at the moment it’s pretty healthy. There have been times when I would have been less happy about it.”
Bumps in the night
Stheeman, who turned 65 in June, was knighted in 2016 for his services to UK government debt management.
There have been regular big events and shocks, but three stand out: the 2008 financial crisis; the Covid pandemic; and a disastrous UK fiscal plan in September 2022 that spooked markets.
After the financial crisis and bank rescues of 2008, the UK increased its borrowing requirements from £58bn in 2007/08 to £146bn the following year and £227bn in 2009/10, both easily new records.
“That increase was unprecedented and produced real challenges for us. It wasn’t initially clear to me I could tell ministers and the Treasury we could get all this cash in merely through the existing tool of our auction calendar. So we introduced operations we had never done before, like a programme of syndications and Gilt tenders and the new post-auction option facility,” Stheeman said.
“That was a completely new approach and in the end it worked fine, but you don’t know that ahead of time.”
There were hairy days too. In March 2009, for example, the DMO had an auction where not all the Gilts were sold – only the third time that had happened, and not repeated since.
Some regarded that as a failed auction, but Stheeman is specific in calling it an uncovered auction, as all the bonds were issued and the DMO took the unsold portion on its books and sold them later – at a higher price. Still, Stheeman acknowledged an uncovered auction is “a hassle” that he would rather not have had.
The scale of bond sales stepped up to a new level when the Covid pandemic erupted in March 2020, at the same time as operational challenges, including setting up remote working and a move to holding two auctions a day for the first time.
“We were effectively told go out and borrow what you can. That was dramatic, but it was no different to the kind of challenges faced by other major jurisdictions in the world. We all had this extraordinary moment of thinking – where’s the cash going to come from?" Stheeman said.
“That year we started off thinking we were selling £156bn … we ended up raising £486bn in Gilt issuance.”
That was twice as much as in any other year.
The UK suffered a more exclusive shock in September 2022 when the brief government of Liz Truss announced a budgetary plan that rocked financial markets and saw Gilt yields soar, almost sparking a crisis in UK pension funds.
Stheeman said he was relatively sanguine on how that short, sharp event played out for the DMO.
“We don’t make fiscal policy. Our role is just delivering the financing remits and if ministers want our advice we will happily offer it, and if they don’t want it, that is their decision. I felt at the time we offered what advice we could and if that advice is taken on board or it is not, that is not my daily worry.”
Another landmark event now sees the Bank of England, which over the past 15 years through its quantitative easing bond-buying policy has become the largest holder of Gilts with about £700bn, as a rival seller through auctions as it unwinds this policy and carries out quantitative tightening.
That is being handled carefully. The DMO is in regular communication with the BoE, but only to coordinate when sales are held, rather than policy decisions. The aim is to avoid holding auctions on the same day, and if there is a clash, to not sell on the same part of the yield curve.
“There’s a sort of elegant dance around that. Neither of us have any interest in seeing the market disrupted,” Stheeman said.
He is handing over to Jessica Pulay, who will be the first female head of the DMO and has been co-head of policy and markets since joining the DMO in 2015. She previously spent 16 years at the EBRD, and worked at Morgan Stanley and Goldman Sachs.
Stheeman declined to comment on whether he will take another role. But he is going out on a high. The DMO set a new demand record of £110bn with the order book for a 10-year £11bn deal on June 14, his final syndication.
