Administration and expenditure of the Chancellor's departments, 2008-09 - Treasury Contents

Examination of Witnesses (Questions 1 - 19)



  Q1  Chairman: Robert Stheeman, I welcome you back to the Sub-Committee. Could you introduce yourself formally and your team, please?

  Mr Stheeman: Certainly. I am Robert Stheeman, Chief Executive of the Debt Management Office, to my left is Jo Whelan, the Deputy Chief Executive and the Joint Head of Policy and Markets, and to my right is Jim Juffs, the Chief Operating Officer.

  Q2  Chairman: Thank you very much. How have your priorities changed over the last year?

  Mr Stheeman: Fundamentally, they have not changed that much. The overall task that we have been set has become that much larger, but the actual nature of the priority remains very much the same. It has always been for us to focus as much as possible on delivering the remit as smoothly and successfully as possible and that has not changed despite that it is much larger in size.

  Q3  Chairman: So it is simply the quantum of the task that has changed?

  Mr Stheeman: Absolutely.

  Q4  Chairman: Given how closely you are now working with the Treasury, does it make sense to retain the office as an autonomous agency?

  Mr Stheeman: In my opinion, my personal opinion, of course—and I would say this, wouldn't I?—yes, it does because we are a very focused, professional, small outfit which has to interact directly on a daily basis with the market in particular. We need to also provide market intelligence where necessary to the Treasury. I think all those are things which if you are actually within one bigger, larger department you could potentially lose that focus. It also helps us, I think, attract key staff, motivate people because they know what they are there for. I think one of the key issues for is us is simply being able to say, "This is our focus. We are not distracted by other things," and I think the separate agency status helps, even though we are under no illusions that we are somehow independent, we are a legal part of the Treasury.

  Q5  Chairman: But you are also working for the Bank of England. You have provided nearly a billion pounds to purchase assets under that facility, have you not?

  Mr Stheeman: We do not work for the Bank of England directly, if you like, we work for the Treasury in providing the financing for indeed the non-QE part of the asset purchase facility. That is absolutely right, but I think it is quite important to note that what we are doing is ultimately providing exactly the same function that we have always provided, which is to meet the cash needs of the Exchequer.

  Q6  Chairman: For the first time that Standard & Poor's has downgraded its sphere of the UK economy to negative from stable. Do you have regular meetings with the credit rating agencies?

  Mr Stheeman: In the DMO we do not have very many meetings. We have on occasion had meetings but the main part of those meetings is conducted usually within the Treasury with a focus on the fiscal side in particular, rather than just the debt management side. We have on occasion, as I say, had a visit, I can recall, earlier this year from one of the rating agencies ourselves and we are obviously happy to provide them with whatever information they want, but their focus is usually about the fiscal position rather than purely about debt management.

  Q7  Chairman: But there would be an effect, would there not, on your work if the credit rating dropped further?

  Mr Stheeman: Absolutely, and clearly we watch very carefully what the rating agencies opine. At the same time, that effect is likely to manifest itself, if at all, in the price. It is not necessarily going to manifest itself in, if you like, the longer term issues for us, in the way we access the market or the strategy that we are trying to pursue, or the advice that we would give the Treasury.

  Q8  Chairman: So you do not have contingency plans to meet a sudden drop in the rating?

  Mr Stheeman: Not directly because first of all that almost presupposes that something like that could or would, or will happen. We do not know. The rating agencies ultimately provide an opinion. It is their opinion. Does it have an effect on the market? It may do, and I would imagine that any downgrade, any formal downgrade—and we have only so far had the outlook changed—could move the market, but in my experience our sense is that actually rating agencies are what we would call lagging rather than leading indicators. By the time they have opined, the market itself has probably to a large extent already moved and discounted that information in the market.

  Q9  Sir Peter Viggers: You explained the preference for longer dated gilts in your annual reports in 2007-08, pointing out the advantages in terms of cost, yet the number of short dated gilts that you have issued recently, the proportion, has increased considerably. Could you comment on that?

  Mr Stheeman: Certainly. We very much remain very keen to issue as much long-dated paper as we possibly can, in particular because we regard it as generally cost-effective—we know the pension fund demand is out there—but as the financing requirement has risen as dramatically as it has it has forced us to go to that part of the curve which is the deepest and provides the most liquidity and enables us, if you like, to raise large amounts of cash in a relatively short period of time. To give you an example of that, a little over a year ago the average size of our short-dated auctions, anything up to seven years, was usually in the region of three, sometimes three and a half billion. This year they are five billion, so we have been able to increase the average size of those auctions significantly. The average size of long-dated auctions remained unchanged more or less at around two, two and a quarter, two and a half billion.

  Q10  Sir Peter Viggers: Is the appetite for short-dated gilts linked with overseas development?

  Mr Stheeman: Certainly overseas investors, if and when they are active in the market, it tends to be primarily in the shorter end of the market, occasionally also the medium sector up to ten years, but they are generally focused very much on shorter maturities, that is absolutely correct.

  Q11  Sir Peter Viggers: How do you anticipate that you will replace the short dated gilts when they mature?

  Mr Stheeman: That depends very much on how the financing requirement evolves over the next few years and the size and the nature of that requirement over the next few years. We still, I think, will certainly continue with our aim to try and focus as much as possible on spreading the issuance out across all maturities, but it could be that if the financing requirement were to decline I think it is reasonable to assume, as long as there is no major shift in the shape of the yield or something that would suggest it will be an extremely expensive strategy, that we will try as much as possible to spread that issuance around and that could lead to a decline in short dated issuance again.

  Q12  Sir Peter Viggers: Do you have any national security concerns arising from an increased reliance on overseas buyers?

  Mr Stheeman: Not really. You are talking ultimately about investors in debt. It is not the same thing as investing in equity. Overseas investors do not have voting rights. I think that the portion of overseas investors that we have in our portfolio, which is about a third, is not unduly high. If you look at the fact that we have got about a third overseas, a third with the pension fund industry, I think that gives us a sort of what I would call balance and probably a diversification in our investor base which is actually quite positive.

  Q13  Sir Peter Viggers: If there were uncovered auctions, what is plan B?

  Mr Stheeman: Well, we would probably follow exactly the same procedure that we followed earlier this year when we did have an uncovered auction, which means that we make up the shortfall in our cash and management operations. The simple fact is that we will take directly on our own books, on the Debt Management Account, the full amount of the gilts that has been issued from the National Loans Fund and we will fund that ourselves. Then we have a procedure whereby there is a short period where we do not try and sell those gilts back into the market so that the market can, if it wants, adjust and then we sell that subsequently into the market. We would follow that procedure again because we believe the market places a lot of value and emphasis on the predictability of that system and not being surprised by any actions that we would then take perhaps to make up that shortfall.

  Q14  Mr Breed: In your statement in the report and accounts you indicate that the DMO has received a remit in 2009-10 which will again require a record level of gilt sales of 220 billion. Is that a realistic amount of debt to sell in 2009-10?

  Mr Stheeman: I think so. We are more than halfway through the year. We have done, I think, just a little bit over 135 billion so far, but to me the best indication of that is probably due not to what we have done just since 1 April but on an annual rolling basis actually since this time last year, which was the moment we had to step up issuance so much at the time of the bank recapitalisation actually we have issued, I think, over 200 billion already in the last twelve months.

  Q15  Mr Breed: In that case, is the market not becoming saturated with UK gilts?

  Mr Stheeman: I do not see a sign of that. That does not mean that we are complacent or that we in any way underestimate the scale of the challenge. I think we have been fortunate as well over the last six months in that probably market conditions have been more benign than we and some commentators would have actually expected. But we do not see signs of saturation. The auction programme has gone relatively well. Auctions have tended, since the uncovered auction, to be relatively well covered. The market has held up relatively well, but I would also stress against a very benign backdrop and, of course, we have to be fully aware and cognisant of the fact that the Bank itself has been buying gilts in the secondary market.

  Q16  Ms Keeble: What effect is QE having on the current view of the sales? You referred to it briefly earlier.

  Mr Stheeman: It's clearly having an effect. It is incredibly hard to try and quantify what that effect is. I think that what it has certainly done is helped create the benign conditions I was referring to. The best example of that is that we have to acknowledge that since the beginning of this financial year net gilt issuance—net in terms of what we have provided to the market in terms of supply—that has been, as I say, 135 billion, but at the same time the Bank has taken out 160 billion from the market, so effectively we have had a decline in available gilts in the market by approximately 30 billion. So that is actually almost a net decline in gilt supply, so there clearly has been an effect. My opinion is that the effect is shown in the yield levels that we currently see across all maturities because the Bank is now buying across all maturities. Exactly where yields would be were the Bank not to buy, I don't know.

  Q17  Ms Keeble: Do you want to make a comment on the current yield levels?

  Mr Stheeman: I would say two things there, and it is quite important for me to stress that we genuinely in all the debt management policy advice we give to the Treasury, the decisions we take, we do not, if you like, attempt to finesse the level of yields or try and take advantage of current levels. The only obvious comment I would make is that we are in some maturities across the board at intergenerational lows when it comes to yields, so the one positive factor which must exist is that we are currently raising money at relatively, in historical terms, cheap levels.

  Q18  Ms Keeble: Which is a positive statement about confidence in the UK?

  Mr Stheeman: It may be. I think it is ultimately very simply a question of supply and demand.

  Q19  Ms Keeble: I just wanted to check up on one question to follow on from what Peter Viggers asked previously, which is that you have introduced the use of mini-tenders in syndicated programmes, increases of short dated gilts and the increase in overseas investors. Do you see any risk in that change in profile of what you are doing, or do you think it will all just proceed smoothly?

  Mr Stheeman: The way I think I can best try and answer that question is to say that we fundamentally need an efficient, well-functioning and deep gilt market for us to be able to raise the money that we do. That is absolutely critical. So I think it is fair to say that everything that we try and do in terms of our strategy is around facilitating the distribution mechanism for gilts. So you mentioned mini-tenders, and the various things, syndications, that we have introduced this year, are primarily designed to smooth the distribution process for our gilt programme. As long as we have this well-functioning market, I believe that we will be able to continue to deliver the remit successfully. But having that is incredibly important.

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