(Bloomberg) — The UK government should radically alter its approach to debt management and buy back long-dated bonds, according to researchers at Bank of America Corp.
Most Read from Bloomberg
The UK can ease debt pressure through selling much more short-dated debt, including bills, as well as buying back long-dated gilts that trade at a discount to par value, according to strategists Mark Capleton and Agne Stengeryte.
“The gilt market is restricting fiscal choices and has become an undesirable political barometer,” analysts wrote in a note to clients Wednesday. “Gilt issuance needs to adapt, radically and rapidly.”
It’s the latest call for an overhaul of the UK’s debt management framework. The nation’s defined-benefit pension programs historically had near-insatiable demand for long bonds, meaning the UK sold far more of such securities than other countries. In recent years, though, demand has dwindled, contributing to higher long-term borrowing rates.
The UK Debt Management Office has been gradually shifting its sales program to reflect the change in demand for longer-dated debt. Some analysts are calling for a faster turnaround, with Barclays Plc strategist Moyeen Islam saying last month that the interest-rate costs of issuing long gilts “offer poor value for taxpayers.”
The Bank of America researchers cited the US’s decision to no longer sell 30-year bonds in 2001 as an example of how national treasuries can quickly shift their issuance strategy to ease financing costs.
The analysts also said the UK has an “urgent” need for a larger short-dated bills market, similar to the one in the US. They predict high demand from banks as the Bank of England drains reserves and also revived a push for the UK to enter the swaps market.
The UK should buy back long-dated gilts that are trading below par value, BofA analysts say, suggesting purchases of £750 million ($973 million) per month. The total gilt market trades at a £407 billion discount to par, with most of that coming from long-dated bonds, they calculate.
Because the reporting convention for government indebtedness reflects notional bond amounts rather than current market values, such operations could help reduce debt metrics, they said.
“In a hypothetical frictionless world, the government could actually ‘re-coupon’ the Gilt market. It could buy all the gilts at current prices and reissue new par bonds to pay for them,” they said. “This would knock about 16% off the UK‘s debt/GDP ratio, in terms of notional debt outstanding at par.”