The UK government is looking at new ways of raising money in the markets because of worries it will fail to sell enough debt in conventional bond auctions.
It is considering syndicating debt in the capital markets – something it has only done once before – and making private placements, something it has never done before.
The move comes as world bond markets are facing an unprecedented surge in issuance by governments, who are having to raise vast amounts of debt to help pay for economic stimulus programmes and bank bail-outs.
More than $3,000bn in government bonds are expected to be issued globally next year – three times more than this year. The US is forecast to issue as much as $2,000bn, with the rest coming mostly from the big European governments.
Some governments have already run into trouble with a German bond auction failing last month, when the amount raised fell short of the government’s target.
Although the UK has not seen a bond auction fail, it is facing particular problems because of its large debt programme. Its annual debt sales are set to soar close to £150bn ($226bn) in the fiscal year ending in March 2009 – three times more than the previous year.
Roger Brown, global head of rates research at UBS, said: “Some recent auctions in the UK and Europe have gone poorly because of concerns over future supply. In the UK, these problems are likely to increase as growth turns out worse than the Treasury forecasts and the volume of planned funding rises further.
“Even though yields are at record lows, we expect long-dated yields to be pushed higher. Current UK plans suggest the gilt market could double in size over the next three years, which in itself would sharply raise debt service costs.”
The only previous time the UK government has syndicated a bond was in September 2005. Syndication involves using a number of banks to sell the debt to investors in the open market. Private placement involves selling the debt to a handful of big investors.
Normally, a government the size of the UK can simply announce an auction for a set amount of bonds, safe in the knowledge that enough investors will be willing to buy the debt at a competitive interest rate or yield.
The government is also looking at using mini-tenders, which are similar to auctions except a smaller amount of debt is sold and investors are guaranteed the price at which they can buy the bonds.
The UK is seeking views from the market over the next month. It is particularly concerned over the issuance of longer-dated bonds, or those with maturities of more than 15 years, and index-linked, or inflation protected, debt.