Increased interest from institutional investors in Asia, including central banks, sovereign wealth funds and life insurers, has improved liquidity in the Gilt market, says Robert Stheeman. And there is a virtuous circle at work: as liquidity increases, more Asian buyers will be attracted, he told Asiamoney PLUS last week.
There is no precise breakdown on how much UK sovereign debt is held by Asian buyers. The overseas investor category accounts for 30.8% of the debt portfolio, according to the latest numbers. This is up from less than 20% ten years ago.
The increase is all the more striking considering that the DMO’s issuance programme has almost doubled in the past few years.
“The numbers that we get from the Office of National Statistics just show total overseas holdings, and a large number of those holdings are held through nominee accounts, so we don’t know the exact nationality,” said Stheeman.
However, Stheeman said that he was aware — from investor meetings and anecdotal evidence from primary dealers — that the number of Asian gilt buyers is on the rise. Many of those investors are official institutions — central banks and sovereign wealth funds — but fund managers and Asian life insurance companies are also increasingly keen to buy into the market.
“This is partly because — with the increase in issuance — you have an increase in market liquidity,” said Stheeman. “And international investors, which include Asian investors, value market liquidity almost to a greater extent to [investors] here in the UK.”
“Our domestic pension fund industry is more a buy and hold investor base. But as our market has become more liquid it’s become more attractive to Asian investors.”
He said that the UK relies on the Asian investor base much more than it used to — and takes it very seriously, particularly in the shorter end of the market, where most of the buying activity has been focused. But buyers have been selectively moving into longer tenors, too.
“We are aware that there has been some small buying of the long end from Asian pension funds, and anecdotally there’s been some Japanese interest,” he added. “We are also aware that some of the central banks, especially last year and into the early part of this year, have been extending their purchases further down the curve, given the very low yields on offer at the short end of the market.”
In the past, central banks in the Asian region would only have bought three-year or five-year gilts, Stheeman said. But in the search for yield, some moved up to ten-years or even longer. He said he would be watching closely whether this change reverses once yields on gilts rise again and its impact on both the shape and the absolute level of the yield curve, he said.
In any case, that interest does not extend much to the very long end, which is frustrating given that the UK DMO is trying to extend its yield curve. On June 25, for example, the sovereign issued GBP5 billion worth of 55-year paper. Around 97% of the deal went to domestic accounts, in particular to the UK pension fund industry.
“[The longer-term paper is] all very domestic, unfortunately,” said Stheeman. “I’d happily sell some of that to Asian investors, but it’s not their primary focus of interest.”
Diversification play
One further selling point for the UK market is that it offers some diversification from the euro and the US dollar.
“We’re something different,” said Stheeman. “There was a period late last year — which hasn’t dissipated entirely — where we were viewed as a bit of a safe haven.
“I’m cautious about that as it’s a bit of a double edged sword. If it means you’re basing your strategy on woes occurring elsewhere in the financial world, that doesn’t sound to me like a very plausible long-term strategy. I’d prefer that people see Gilts as a worthwhile asset to buy in their own right because they carry credibility.”
On the topic of his relationship with Asian investors, he said that over the past few years he has been to China, Japan, India, Singapore and South Korea.
“I wouldn’t go there officially unless I thought that there might be some potentially interested investors in those countries,” he said. “It’s very important for us to understand the nature of the demand. We need to engage with them — not just to provide them with information, which we’re very happy to do, but also to try to understand them, their needs, their requirements, and the nature of the demand that they have for our products.”