In times of crisis, we now know the playbook by policy makers. Governments will spend it and the Central Banks will buy it. The more “control” (or as they would call it “coordination”) that these two arms of policy have, the more effective it is. In the UK, we have seen a relatively swift and effective response by the Treasury and the Bank of England (BoE) since the crisis took hold.
We do not yet know how many Gilts will need to be issued in 2020/2021 to finance the deficit on the day-on-day spending, but with commitments directly linked to covid-19 spending and the need to cover workers’ wages, unemployment benefits/sick pay, grants to SMEs, tax breaks for some etc. etc. – along with “normal” spending and the inevitable drop-off in tax receipts – it is not impossible we could be looking at Gilt issuance of around £250bn to £300bn when all is said and done. We will get a better picture of this on the 23rd April when the Debt Management Office (DMO) announce the new remit for the year. The previous largest ever year for Gilt supply was 2008/2009 where £227.6bn of Gilts were issued.
Now, if we assume the DMO – who control the sale of Gilts to the market – spread out this issuance over the year, we are looking at a run-rate of £20bn to £25bn a month in issuance. The other side of this is the BoE buying we will see through the new QE programme (announced two weeks ago). We expect this to amount to around 190bn of Gilts and 10bn of Corporate QE. Based on the current run-rate of buying (c. £13.5bn a week), the Bank could well be done by June/July 2020.
This does raise the interesting prospect that if the QE programme is done by the summer – and the DMO smooth out their issuance plans – the burden will fall on the ordinary Gilt investor to buy up the increase in supply into Q3/Q4. Given this potential imbalance, some have asked why the Bank has acted so quickly in its QE buying. However, to us the approach seems eminently sensible.
In the event that we are not back to a degree of normality by the second half of the year – which may allow for a more fiscally prudent approach – and if the economy is instead assumed to be still faltering, we would firmly expect the Bank to have dusted down its policy playbook and engaged in further and perhaps unconventional policy action. Under this scenario, fears over any supply overhang from the DMO will prove to be short-lived.
Better to be early to the party than not attend at all.