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

Examination of Witnesses (Questions 20 - 35)



  Q20  Mr Tyrie: What discussions do you have with the Bank of England before you make gilt disposals, before you go out and sell gilts?

  Mr Stheeman: Virtually none. I mean, we clearly talk to the Bank of England on an operational level, but there is no discussion between us and the Bank in terms of what we would choose as a debt management strategy, in the same way as the Bank would not seek to garner our views in terms of, for instance, the way it carries out QE.

  Q21  Mr Tyrie: But they are the biggest investor of the lot. You have just given the figures. You have regular meetings, do you not, with investor groups at the moment to decide what maturities to issue, to find out where the liquidity is in the market, and yet you are not talking to the biggest buyer of the lot?

  Mr Stheeman: I think if we were to talk to the Bank about, if you like, the programme or even, dare I say it, as we do with other investors, ask the Bank the question, "What would you like us to issue?" If that was to happen—and I can assure you it certainly does not happen—I think the market would rapidly lose confidence in, if you like, the conduct of both debt management policy and possibly even monetary policy.

  Q22  Mr Tyrie: And they are not even sitting in on these investor group meetings?

  Mr Stheeman: We have occasionally invited them in the past. Recently they have not joined these meetings but in the past more as an observer so they are aware of what the investor conditions and views are, absolutely. As I say, we talk to them on an operational level, but in terms of trying to separate debt management policy and monetary policy, both we and the Bank are very keen to try and maintain that separation.

  Q23  Mr Tyrie: You have described this extremely benign environment in which the Government is taking the lion's share of what you are trying to get out into the market. Not only is that going to stop, it is going to go into reverse, is it not? The Government is going to have to shift this stuff? So the pressure in the gilt market is going to become very severe indeed at some future date. Yields are going to rise, are they not, quite a lot?

  Mr Stheeman: I fully accept that and I would be the first to acknowledge that I would accept that whenever the Bank decides both to stop QE and potentially even to reverse it, we will find ourselves in a very different environment. But it goes back to my point, and I completely agree with you, I think yields will rise. I do not know by how much, but they will rise. But at the same time, in fairness, that is ultimately where the market and this efficient market mechanism that I was referring to kicks in. If the market does its job well and efficiently, then the price of the gilt that we are selling should be able to adjust itself relatively smoothly, but that is absolutely key. We are under no illusions about the challenge ahead!

  Q24  John Thurso: I wanted to ask about the Public Works Loan Board. Who would be the best person to answer questions there?

  Mr Stheeman: Any of us.

  Q25  John Thurso: Well, let me ask the question. The amount lent by the Public Works Loan Board this last year is reported as being about 6 billion, down from 10 billion the previous year. How much of that is through early redemption interest rates causing a drop in lending?

  Ms Whelan: We cannot really ascertain exactly an amount that is related to a particular cause, but it is worth noting that in that period interest rates changed quite a bit and that probably led to some local authorities revisiting their Treasury management strategies. We saw, for example, some repayments of the long dated borrowing. There were, repayments across the maturity sectors but mainly in the shorter dated and in the longer dated, and at the same time I understand there was a fall-off in the amount that local authorities had invested. So potentially there were some alterations on both the asset and liability sides of their balance sheets. When we process the loans we are not mandated to ask exactly why they are doing it.

  Q26  John Thurso: The point behind this—I am sure you are aware of it—was the Communities and Local Government Committee Report, which cited the November 2007 chance in the rates, which meant that actually it was too punitive for local authorities to repay, so they hung onto the loans and then invested the surplus cash. Therefore, when they all got stuck by being in banks in other countries, there was more at risk because they had not repaid loans which they might otherwise do and they called for some pretty urgent review of that. Is that for you to push through?

  Ms Whelan: It is partly for us and we have actually got a consultation letter out currently which is being put forward by the Debt Management Office and the PWLB together acting rather on behalf of the Treasury. The whole thing is governed really by a piece of statute about the National Loans Fund, which says that the National Loans Fund must not lend at a loss and in the statute it sets out a certain methodology that can be used that will accord with that statute provision. That allows us, or requires us really, to compute the notional government borrowing rate at the time we make advances. So the methodology that has been in place for a while now is consistent with that. What we are currently consulting on is whether it would be acceptable to stakeholders to slightly change the operational process for that, which we would hope might allow the costs to be slightly lower in future, but we do need to see what the results of the consultation are as to whether people will find it operationally straightforward to do it according to the way we have suggested it might be done.

  Q27  Mr Brady: How worried are you that there might be uncovered auctions in the future?

  Mr Stheeman: I would have to logically expect that at one point there will be an uncovered auction. I don't know when that will be. I think I probably said exactly the same thing a year ago, so I apologise, but it is in the nature of the market that from time to time you will have an uncovered auction. My concern, as I said, I think then, is always around the notion that potentially there is something structurally wrong in the remit which would suggest potentially that we are facing not just one uncovered auction but maybe several. Were that to happen, then I will be slightly more concerned, but having said all of that, I do tend occasionally just to point out the auction process, what it is, what it tells you about demand at a certain time, and it really only tells you about demand at the moment you hold the auction, at 10.30 on any given day. I always think it is worth recalling that, for instance, last year, for whatever reason, I think Germany experienced something like ten or so what has been referred to as "technically" uncovered auctions, yet no one suggested fundamentally that there was a problem there with selling Bunds or that there was anything other than a view that German Government Bonds represented the best possible asset in their market. So I am not that concerned, but I would be concerned if it was a sign that the distribution mechanism is not functioning efficiently. I always come back to that point, I know, but that is absolutely key from our perspective.

  Q28  Mr Brady: When you had the uncovered auction last year you just do not feel that that was the case, that there was structural bargaining?

  Mr Stheeman: I think one of the main reasons for the uncovered auction in March was the volatility that we were experiencing in the market at that time and volatility indeed is something which the market does not like because it impact especially on the risk appetite of our primary dealers, of the Germans, the gilt edge market-makers, and if their risk appetite is diminished, that indeed is something which we are not so happy about, but that is one of the reasons why we have introduced also these supplementary issuance licences this year.

  Q29  Mr Brady: Are you planning future syndicated auctions, and if so can you say a word about what the cost of that is as opposed to the cost un-syndicated?

  Mr Stheeman: So far we have had the planning assumption this year for this current financial year that we will be doing a total of 25 billion in syndicated auctions. We have completed three so far and the fourth is actually occurring today. We have syndicated a new 50 year conventional gilt seven billion in size, so we have done a very large part of the 25 billion programme in total. The costs have been to date, I think, just over £36 million, which have been paid in fees, including today's syndicated auction that is just over another 15 million, so it is just a bit above 50 million in total this year, so far.

  Q30  Mr Brady: How does that compare with the cost of unsyndicated?

  Mr Stheeman: The costs of mainly auctions? That is a very, very good question. We do not know. We have to guard against the notion that auctions are a cost-free way of issuing debt. They are not. We can easily end up paying sometimes quite large concessions through the auction programme. The big difference between auctions and syndications is that the cost that we are paying for syndications is explicit. We are actually paying them out in hard fees. I am sorely tempted to say that syndication from time to time is potentially a more cost-effective way of issuing large amounts in one go and thereby reducing the number of auctions that we have to hold and thereby reducing arguably the risk premium, whatever that is, that the primary dealers might be charging us in that process.

  Q31  Mr Brady: When is it appropriate to hold a mini-tender and how many of them have there been this year?

  Mr Stheeman: I think we aim to hold about one once a month. Effectively mini-tenders are nothing more than small auctions. They are mini-auctions. They tend to be in general roughly half the size of an auction. We introduced them for the first time a year ago when the remit was suddenly increased, primarily as a way also, as with syndication, of focusing on long-dated conventional and index-linked issuing because demand sometimes is not always as big as a full auction size that we are trying to get away. The demand can actually be slightly smaller but it does not mean that it is not there and it does not mean that we are not keen to tap into it. So very often a lot of the stresses in the market if a particular bond might be regarded by the market as in very short supply we are able to address that demand by the mini-tender process.

  Q32  Mr Brady: Have top-up auctions been successful in 08-09 and 09-10?

  Ms Whelan: I think so, very much so, and what we have tried to do there effectively is introduce a mechanism to incentivise bidders at auction by allowing them the option to take up to 10% of their allocation at the clearing price on the same day but a few hours later, at two o'clock. As you would expect, the success can generally be measured, in terms of whether they take it up, as to whether the price is either above or below where it was at the time of the auction. If it is below, obviously the take-up will be very low, but we also think that the primary measure of success is actually just to incentivise bidding. We need to have, if you like, eager bidders at the auction and the top-up facility is one way of trying to achieve that.

  Q33  Mr Love: I want to come back to the question you were asked by Mr Tyrie in relation to quantitative easing. While I take on board the point you made for you to act in concert in some way alongside the Bank of England would be seen very negatively by the marketplace, but it is important that you have a well-functioning market and therefore I wonder if any consideration has been given by the Debt Management Office to whether there needs to be some arrangements made for when the quantitative process reverses?

  Mr Stheeman: That is an entirely legitimate process and you are probably very much aware that the Governor of the Bank has said on numerous occasions that when it comes to any disposal of their gilt holdings that they will be actually coordinating and talking to us in that process, and you would expect that on an operational level we will certainly be doing that. I completely agree with the premise of your question. Neither we, nor the Bank, nor the Treasury, or anyone in the authorities has any interest at all in seeing, if you like, a disorderly market or anything which is going to upset the market and the Bank has made that very clear. So we will be talking to them in detail about that.

  Q34  Mr Love: I was just going to say that. You indicated earlier on that you have not had any discussions at all with the Bank, as I understood the response you gave. Surely now is the time to be at least exploring what will happen when this process reverses itself?

  Mr Stheeman: As I say, on an operational level we will certainly be doing that, but what I am talking about now, if you like, is the operational side and I think the Bank would not be very keen to send a signal, or for us to send a signal that we are, if you like, contemplating a change in direction as far as the Bank is concerned in terms of what they are doing. But when the time comes, I am sure that we will be talking to them in quite a bit of detail. If I could just make one point there. As an example of the cooperation which we have with the Bank, what I describe as operational cooperation, you may be aware that the Bank lends out part of its gilt portfolio that they have purchased through us into the market in order to help facilitate the repo market, and that has been something which the market has welcomed very much indeed. So I thin it just underlines how conscious the Bank is of avoiding disruption to the market.

  Q35  Chairman: When you came last year we expressed some concern about the capacity of your office to handle this increased workload. I see from your Annual Report that your staff numbers have not in fact gone up. Have you got enough people?

  Mr Stheeman: I think we do for the moment. We are a lean organisation and I am quite happy actually that we stay that way. Just so that you know, the Annual Report obviously goes until the end of March. At that time we had the resources and obviously I think we had approximately 90 staff members. That is probably now close to about 110, 115, to be precise about 113, so it actually has gone up and, as you will expect, always when you start adding resources there is always a lag in terms of actually getting the right people in place in time. But we have had discussions with the Treasury about the resources. We have received the resources that we have requested and we requested more resources, also financial resources, and we have received those.

  Chairman: Good. All right. As you know, we are on a tight timetable today so we are going to leave it there. If we have further questions we will follow them up in writing, but I would like to thank you and your colleagues for appearing today.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 9 March 2010