–Stheeman: Sees Market Conditions Remaining ‘Benign’
–Notes Strong Investor Appetite For Short-Dated Bonds
–DMO ‘Assumes’ BOE Will Meet its Inflation Target In Med-Tm

LONDON (MNI) – The UK Gilt market should be able to absorb the
large supply of government bonds on offer during the 2011-2012 financial
year, UK Debt Management Office Chief Executive Robert Stheeman told
CNBC television here.

Stheeman also told CNBC that market conditions would remain
“benign”:

“In general, we thank that market conditions, which is crucial for
us will continue to remain as benign as they have been and we think that
the market has developed sufficiently to be able to absorb that supply –
which is large – relatively easily”.

“For us a key factor, is that, if necessary, the market can adjust
very smoothly to whatever developments may occur. I say that because
actually some people think that the Gilt market isn’t as deep as the US
Treasury market or indeed the Bund market but it has come on in leaps
and bounds over the last few years in terms of liquidity, turnover,
depth and – what I would call – the price-adjustment process. We need
that price-adjustment process to work smoothly”.

Stheeman also noted a strong investor appetite for short-dated
bonds at the moment:

“On short-term issuance: We feel it’s quite cost-effective to do
so, as an issuer, we have unusually for the UK at the moment, a very
steep yield curve especially in the shorter maturities. Secondly, we’re
also responding to a clear signal that investor demand suggests that
actually the market would very much like to see more short issuance at
the moment”.

The official also insisted that the DMO would not adjust its
funding strategy according to its views on whether the BOE would
meet its inflation target, but said it ‘assumed’ that the central bank
would meet its CPI goal in the medium term:

“From the DMO perspective, we assume the Bank (of England) will
naturally meet its inflation target over the medium, over the long-term
and that’s absolutely critical. That’s the underlying assumption we
make”.

He continued:

“When we issue inflation-linked bonds we do so for what we would
describe as good debt-management reasons, not to take account of the
BOE’s monetary policy decisions or anything like that. We’re doing it
because we purely believe that that’s where demand exists and it’s also
an asset class that is favoured by the domestic pension industry. So we
don’t view it through an inflation/monetary policy prism”.

“For us a key factor, is that, if necessary, the market can adjust
very smoothly to whatever developments may occur. I say that because
actually some people think that the Gilt market isn’t as deep as the US
Treasury market or indeed the Bund market but it has come on in leaps
and bounds over the last few years in terms of liquidity, turnover,
depth and – what I would call – the price-adjustment process. We need
that price-adjustment process to work smoothly”.

–London Bureau; tel: +442078627492; email:dthomas@marketnews.com

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