April 23, 2020 / 2:14 PM / a month ago

UK rushes out $222 billion bond sale to fund pandemic spending surge

LONDON (Reuters) - Britain’s government plans to sell 180 billion pounds ($222 billion) of bonds in the next three months, more than it had recently pencilled for the entire fiscal year as it rushes to fund a surge in spending to soften a coronavirus recession.

The UK Debt Management Office said on Thursday it planned to issue the bonds between May and July.

Previously, the DMO had been planning to sell 156.1 billion pounds of bonds over the 12 months from April.

“This higher volume of issuance is not expected to be required across the remainder of the financial year,” Britain’s finance ministry said.

With the pandemic expected to trigger the biggest fall in economic output in three centuries, the government has taken a string of unprecedented measures to avert a total collapse, including a pledge to pay 80% of the wages of workers who are temporarily laid off.

British government bond yields, which are close to all-time lows, rose only slightly — a sign that investors were not spooked by the details of the debt issuance surge.

“It is eye-watering and unprecedented on the one hand, but unsurprising given all the spending measures to combat COVID-19,” said Marc Ostwald, chief economist at ADM Investor Services, referring to the respiratory disease the virus causes.

Thomas Pugh, an economist at Capital Economics, said the Bank of England would be watching the market reaction closely as it considers whether to expand further its purchases of government bonds to help avoid a rise in borrowing costs.

The BoE’s next monetary policy announcement is due on May 7.

The central bank has increased the government’s overdraft in case it struggles to raise cash in the debt market.

So far Britain has sold 45.7 billion pounds of gilts in April, a record. Auctions due next week will probably raise another 10 billion pounds.

NEEDS MAY GROW

Adding in the extra 180 billion pounds for May to July, the issuance remit for the 2020/21 financial year is already on course to hit an all-time high of 235.7 billion pounds — and that assumes Britain sells no more gilts for the remaining nine months of the year.

“The 225 billion pounds of gilts that will be issued (from April to July) shows the scale of cash the government needs, and that need may grow if economic activity continues to be significantly depressed for over three months,” said Richard Hughes, associate at the Resolution Foundation think-tank.

A Reuters survey of 11 primary dealers had predicted the DMO would announce gilt issuance of around 300 billion pounds for the 2020/21 financial year as a whole.

The finance ministry said a further update to the DMO’s debt sales plan would be announced on June 29.

Earlier on Thursday, official statistics showed the government went slightly over its budget deficit target for the recently ended 2019/20 financial year.

The shortfall is likely to be revised up as the impact of the coronavirus becomes clearer, the Office for Budget Responsibility said.

Borrowing in the 12 months to March stood at 48.7 billion pounds ($60.2 billion), above the most recent estimate of 47.4 billion pounds by the country’s budget forecasters.

That was 9.3 billion pounds higher than in the 2018/19 financial year, the largest increase since 2010.

The shortfall was equivalent to 2.2% of gross domestic product.

Britain’s official economic forecasters last week said the budget deficit could surge to 14% of GDP in the 2020/21 financial year due to the coronavirus shutdown.

Editing by Peter Graff and Catherine Evans

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