UK rushes out huge bond sales to fund COVID spending surge

By Andy Bruce and William Schomberg

LONDON (Reuters) - Britain's government plans to sell more bonds over the next three months than it had previously planned for the entire financial year as it rushes to fund a surge in public spending and soften the expected deep coronavirus recession.

The UK Debt Management Office said on Thursday it planned to issue 180 billion pounds of government debt between May and July.

Previously, the DMO had been planning to sell 156.1 billion pounds of bonds over the 12 months from April.

"This higher volume of issuance is not expected to be required across the remainder of the financial year," Britain's finance ministry said.

Faced with a warning of the biggest fall in its economy in three centuries, the government has taken a string of unprecedented measures to avert a total collapse, including a pledge to pay 80% of the wages of workers who are temporarily laid off.

British government bond yields, which are close to all-time lows, rose only slightly in a sign that investors were not spooked by the details of the debt surge.

"It is eye-watering and unprecedented on the one hand, but unsurprising given all the spending measures to combat COVID-19," said Marc Ostwald, chief economist at ADM Investor Services.

Thomas Pugh, an economist at Capital Economics, said the Bank of England would be watching the market reaction closely as it considers whether to ramp up further its purchases of government bonds to help avoid a rise in borrowing costs.

The BoE's next monetary policy announcement is due on May 7.

The central bank has expanded the government's overdraft, in case it struggles to raise cash in the debt market.

So far Britain has sold 45.7 billion pounds of gilts in April, a record. It plans to sell another 9.2 billion pounds next week in nominal terms, which in cash terms will probably end up around 10 billion pounds.

Adding in the extra 180 billion for May to July, the issuance remit for the 2020/21 financial year is already on course to hit an all-time high of 235.7 billion pounds, even before adding in sales in the remaining nine months of the year.

A Reuters survey of 11 primary dealers had predicted the DMO would announce gilt issuance of around 300 billion pounds for the 2020/21 financial year as a whole.

The finance ministry said a further update to the DMO's debt sales plan would be announced on June 29.

Earlier on Thursday, official statistics showed the government went slightly over its budget deficit target for the recently ended 2019/20 financial year.

The shortfall was likely to be revised up as the coronavirus impact becomes clearer.

Borrowing in the 12 months to March stood at 48.7 billion pounds ($60.2 billion), above the most recent estimate of 47.4 billion pounds by the country's budget forecasters.

That was 9.3 billion pounds higher than in the 2018/19 financial year, the largest increase since 2010.

The shortfall was equivalent to 2.2% of gross domestic product.

Britain's official economic forecasters last week said the budget deficit could surge to 14% of GDP in the 2020/21 financial year due to the coronavirus shutdown.

In March alone, the deficit - excluding state-controlled banks - stood at 3.05 billion pounds, higher than a median forecast in a Reuters poll for a 2.35 billion-pound shortfall.

Central government spending in March jumped by an annual 11.2% but did not yet include the costs of the coronavirus job retention scheme under which the state pays 80% of the pay of workers who are temporarily laid off.

Tax receipts fell by 0.7% and the ONS statistics office said they were probably weaker than its data suggested.

(Editing by Peter Graff)