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Lower UK gilt issuance reflects new pensioner bond, says debt agency head

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(GlobalPost/GlobalPost)

By Ana Nicolaci da Costa

LONDON (Reuters) - Britain's plans to sell fewer bonds than forecast in the coming financial year partly reflects the introduction of a new pensioner bond, the head of the country's debt agency said on Wednesday.

The UK Debt Management Office said earlier that Britain would sell 128.4 billion pounds ($213 billion) of government bonds in the 2014/15 fiscal year, down from 153.4 billion pounds in 2013/14 and below a forecast of 150.5 billion pounds in a Reuters poll.

Gilt futures pared losses after the announcement.

British finance minister George Osborne is courting voters ahead of an election in 2015 with promises of help for savers and tax breaks for manufacturers.

Robert Stheeman, head of the UK DMO, told Reuters there were two drivers for the fall in planned gilt issuance.

"The main one is undoubtedly the higher-than-expected forecast net contribution to financing from National Savings and Investment," he said.

He said the announcement of high-interest bonds for people aged 65 and over, and the rise in the limit of premium bond investments to 40,000 pounds from 30,000 pounds was forecast to help raise 13 billion pounds for the 2014/15 fiscal year.

Lower cash borrowing requirements also contributed to the fall in the gilt issuance plans for this coming fiscal year, Stheeman said.

"The actual cash borrowing numbers have come in better than forecast at the Autumn Statement for the government to the tune of 11.5 billion pounds. So together with 13 billion ... that's a 24.5 billion reduction. You rapidly see where the difference has come from."

The government has also announced a further upgrade to official economic growth projections and a further cut to government borrowing projections for the coming years.

In his annual budget statement, Osborne said the Office for Budget Responsibility - Britain's budget watchdog - predicted the economy would grow 2.7 percent this year versus a 2.4 percent forecast made in a December budget update.

BREAK-DOWN

Stheeman said the DMO's issuance plans were skewed towards greater issuance in long-dated bonds and fewer in short-dated ones compared with the past financial year.

The DMO plans to increase the share of long-dated gilt sales to 25.8 percent of the total from 22 percent last year. The share of short-dated gilts is forecast to fall to 25 percent from 30 percent.

Stheeman said the share of index-linked gilt issuance was the largest to be planned since the 2007-08 fiscal year, with demand for the instrument still strong despite easing inflation.

Inflation fell below the Bank of England's 2.0 percent target for the first time in over four years in January.

But Stheeman said demand for linkers was coming from the "hedging needs" of the insurance and pensions industry.

"We think demand for linkers is still strong. It's an important part of our program. It addresses an important area of demand from the domestic pension industry," he said.

He said 24.1 percent of gilt issuance this year was planned to be in inflation-linked bonds compared to 23.7 percent in the 2013 issuance plans. The actual share of issuance that index-linked bonds made up last year was in fact even higher, at just over a quarter, due to unexpectedly strong demand for index-linked gilts at syndications.

Stheeman also said the debt agency would not necessarily repeat last year's issuance of ultra-long dated bonds.

Britain launched a 2068 conventional gilt and index-linked gilt last year, which both drew strong demand at the time despite some initial doubts in the market before their launch.

"I would just note that last year the bulk of our syndication program was actually focused on our super long, the 55-year maturity. It's not a given that that would happen again," he said.

Stheeman added that the government was still on course to launch an Islamic bond, or "sukuk", in 2014/15 but didn't have any additional details at this stage.

($1 = 0.6034 British Pounds)

(Reporting by Ana Nicolaci da Costa, editing by William Schomberg/Ruth Pitchford)

http://www.globalpost.com/dispatch/news/thomson-reuters/140320/lower-uk-gilt-issuance-reflects-new-pensioner-bond-says-debt-ag