For a man who has borrowed £2tn, Robert Stheeman keeps a low profile. The head of the UK Debt Management Office is the government’s link to financial markets, selling billions of pounds of debt every month to investment banks, pension funds and asset managers.
Despite this vital role, it would be easy to miss the featureless office building in the shadow of London’s “Walkie Talkie” skyscraper, between a sandwich and a coffee shop, where he operates from a third-floor office. But he likes it that way.
“Most people in the real world don’t know what we do and that’s fine,” said Sir Robert, who was knighted in 2016 for services to debt management. “It means everything is going smoothly.”
His skills will face a fresh test this year. Prime minister Boris Johnson, fresh from December’s thumping election victory, has promised a big increase in public investment in a bid to reinvigorate growth and spread wealth to left-behind regions.
The full details of the government’s spending plans will not be laid out until the budget in mid-March. But Sajid Javid, the UK chancellor, has already torn up the government’s fiscal rules to allow an extra £22bn of public sector net investment a year, to be funded by borrowing at low interest rates. Like other governments around the world, the UK has seen its yields drop sharply over the past year amid a broad bond rally.
“I think it’s almost a signal to me from the market — from investors — that here’s the cash, use it to do something productive,” Mr Javid told the Financial Times last week.
Sir Robert’s job is to put that theory into practice. The scale of the borrowing is likely to be large: JPMorgan forecasts gilt sales of £173bn in the 2020-21 financial year, the highest total since 2011-12. So far markets have shown little reaction to the imminent surge in supply, but some analysts think costs will have to rise to lure investors.
Fortunately for the veteran DMO boss, he has been here before. In the aftermath of the financial crisis, the UK’s borrowing requirement ballooned as the economy slumped, with gilt sales peaking at £227.6bn in 2009-10. Then, yields plummeted despite the surge in issuance, as investors scrambled to buy the safest assets. The Bank of England’s bond-buying programme known as “quantitative easing”, meanwhile, unleashed a fresh source of demand.
That experience has left Sir Robert reluctant to make assumptions about the path of borrowing costs this time around. “If you believe in supply and demand you would think surely if we are issuing this much more the yield should go up,” he said. “Well actually, the opposite happened a decade ago.”
The DMO has a mandate to minimise costs for the taxpayer. But that does not mean targeting a specific level of yield. Rather, the government’s debt managers make sure they extract the lowest yields the market will offer by ensuring the smooth functioning of regular auctions and syndications — a form of sale arranged by a group of banks.
“We’re a price taker, not a price maker,” he said. “Generally I’m very confident about what the market can take down.” In more than 500 bond auctions since the financial crisis, there has been just one glitch, in 2009, when the DMO failed to attract sufficient bids for its debt.
Sir Robert explains that the “extraordinary” expansion of public debt on his watch has in some ways made the job easier. When he arrived at the DMO in 2003, issuance in the preceding year had been a mere £26.3bn, and none of it in bonds with a maturity of less than 15 years. A flurry of issuance after the crisis made the market deeper and more liquid, making it easier for investors to hop in and out.
These days, the average maturity of gilts on the market is above 14 years — much longer than in other big bond markets around the world. That could be a source of resilience if yields do rise, meaning a shift in the cost of borrowing takes a long time to feed through to the government’s interest bill.
Sir Robert reckons there are two main sources of unmet demand for gilts which will probably support any step-up in issuance. First, the hunger among pension funds for long-dated assets should allow the DMO to fund cheaply with longer bonds, and particularly those with maturities of 20 to 30 years. Among overseas buyers, who have grown increasingly important to the gilt market, maturities of less than 10 years are most popular.
“Flows into gilts from international investors have held up remarkably well throughout the entire discussion about Brexit,” he said, noting that the exchange rate, rather than the bond market, has borne the brunt of bad news until now.
He points at a Bloomberg screen on his desk, indicating a rise in gilt prices and a fall in sterling after that morning’s surprise drop in retail sales. He hopes that pattern continues, if economic data comes in weak after the UK leaves the EU.
“The market assumes the Bank of England may decide to cut rates and gilt yields decline,” he said. “That doesn’t mean the market thinks everything is looking rosy.”