Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 21 OCTOBER 2009
MR ROBERT
STHEEMAN, MS
JO WHELAN
AND MR
JIM JUFFS
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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