Assuming that Bank of England purchases finish in February, the gilt market faces a six- or seven-fold increase in net supply in 2010-11. A resulting rise in yields is likely to boost pressure on an incoming government to accelerate fiscal tightening.
Revised Debt Management Office (DMO) projections issued with last week's Pre-Budget Report show net gilt issuance – gross sales minus redemptions – of £208.5 billion in 2009-10. The Bank, however, is on course to buy £183 billion of gilts this year, based on current plans for cumulative asset purchases of £200 billion by February. The £200 billion target implies gilt-buying of £198 billion, of which £15 billion occurred in March 2009, i.e. in 2008-09.
The net supply of gilts to the market, therefore, will be only about £25 billion in 2009-10 (i.e. £208.5 billion minus £183 billion), down from £110 billion in 2008-09 and the lowest annual total since 2002-03 – see chart. This fall has contributed to the recent low level of gilt yields – 10-year yields averaged 3.6% in the first eight months of 2009-10 versus 4.2% in all of 2008-09.
Net supply to the market, however, will surge next year, barring an extension of the Bank's buying. The Pre-Budget Report projects a fall in the central government net cash requirement (CGNCR) from £223.3 billion in 2009-10 – inflated by financial rescue costs – to £174.0 billion in 2010-11. Assuming Treasury bills and national savings contribute up to £25 billion to funding this gap (£21 billion in 2009-10), this implies net gilt supply of £149-174 billion, i.e. six to seven times this year's £25 billion.
