Debt Management Office chief says aims to avoid "feast to famine" on gilt issuance

By David Milliken LONDON (Reuters) - Britain's government debt agency said on Wednesday it wanted to avoid the gilt market going from "feast to famine" as it scaled back issuance plans for the coming financial year by less than most dealers had expected. After stronger-than-expected growth allowed finance minister Philip Hammond to lower borrowing forecasts for this year and next in his annual budget, the UK Debt Management Office cut planned gilt issuance to a 10-year low of 115.1 billion pounds ($139.8 billion). This was down sharply from 146.5 billion pound in the financial year that finishes at the end of this month, but above the median forecast in a Reuters poll for issuance to drop to 109.7 billion pounds. Gilt futures initially fell heavily on the news, and 10-year gilt yields pushed to a two-week high, though later on Wednesday they recouped most of their losses. Part of the extra gilt issuance reflects a deliberate decision by the DMO to reduce the amount of funding provided by very short-term Treasury bills and stabilise gilt issuance. "If we can possibly avoid it, we don't like to go from feast to famine," DMO chief executive Robert Stheeman told Reuters. The DMO stuck closely to its 2016/17 split between short, medium and long-dated gilts in its plans for issuance over the coming year. It will also maintain the lower average auction size it introduced a year ago to reduce the risk of failed auctions and help liquidity-constrained dealers ahead of possible volatility in the run-up to June 2016's Brexit vote. "I don't think things have got any worse, and the increase in auction cover ... suggests that at the margins things have got better. But we're not saying that we're fine and back to the glory days of six or seven years ago," Stheeman said. Tougher regulation since the financial crisis has made it more costly for primary dealers - known in Britain as gilt-edged market makers (GEMMs) - to provide the billions of pounds of liquidity potentially needed during a gilt auction. Stheeman said regulatory costs were likely to be more influential than concerns about Brexit in determining if any more major banks quit as GEMMs. Credit Suisse and Societe Generale pulled out a little over a year ago. "I'd be very surprised - though you can't rule anything out - if those numbers change due to anything on the Brexit front," he said, adding he had no current reason to think further departures were on the cards. The DMO also said it had no plans to issue bonds linked to consumer price inflation rather than retail price inflation during the next financial year, something strategists periodically raise as a possibility. "There is still a lot of genuine, real demand for RPI protection. But we watch developments very closely," Stheeman said. ($1 = 0.8231 pounds) (Reporting by David Milliken; Editing by Alison Williams)