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Gilt Asset Swaps: Stheeman’s Reply

Julian D. A. Wiseman

Abstract: Robert Stheeman, Chief Executive of the UK Debt Management Office, gave an interview to Total Derivatives explaining why the DMO does not want to pay long swaps. The arguments as presented fail to engage, let alone convince.

Publication history: Only here. Usual disclaimer and copyright terms apply.

Ahead of the Pre-Budget Report in November 2008, various commentators including this author suggested that, because gilts yield more than swaps, the DMO should pay fixed rather than issue longs†1. On Monday 24th November 2008 Robert Stheeman, Chief Executive of the UK Debt Management Office, gave an interview with Total Derivatives†2. Total Derivatives reported that “the DMO's CEO Robert Stheeman today all but ruled such a move out”.

I've read what Wiseman and Capleton and others have written about this and we welcome their views. Our minds aren't completely closed to the idea, but for the DMO to start getting involved in derivatives would mean clearing some very high hurdles [in terms of making a case for the move].

Thank you for acknowledging the source of the idea by name—a courtesy rarely granted by the UK’s central bank—and it is quite right that something novel should clear some “very high hurdles”. Happily, these hurdles are listed.

  1. at the moment we have the job of raising rather a lot of money in rather short time…

    Translation: we’re busy. Well, yes. The DMO is busy because lots of money must be raised. But for exactly the same reason, it is even more important to get best possible value for the debt sold: the more of it there is, the larger the saving to the taxpayer.

  2. … and one problem is that paying swaps won't actually achieve that core purpose

    True, but just paying swaps in isolation wasn’t the suggestion. What the DMO should do is substitute sales of longs for two actions: one of which is issuing shorts; the other of which is paying fixed on a long-dated swap forward starting on the maturity date of the short. This does get in the money, and pushes out the long-term duration, albeit in a different form. It also signals that the UK government does not think Libor+50bp to be a fair price for its debt. (A corporation would be happy to sell debt at such a yield, but a corporation may well believe that its expected life is a good deal shorter than 200 years = reciprocal 50bp†3. The UK government should neither believe that its expected life is so short, nor signal that it believes it.)

  3. it would have to be a very persuasive argument to convince us and Treasury that taking positions in the derivatives market would be the right thing to do. You have to bear in mind issues like counterparty exposure

    The DMO is entirely right to consider counterparty exposure. But the original suggestion did say that before announcing the scheme “the DMO should ask LCH.Clearnet to extend their GBP SwapClear service to ≥2049 or to ≥41¼ years”. If the DMO had made such a request, and been refused, then there would be an argument about “counterparty exposure”. But no hint of such a request has come from any source—and it also seems unlikely that such a request would be refused. So this argument also falls.

Of course, it might be that, in an interview covering a range of topics, Robert Stheeman’s other objections to this plan were cut by the reporter or by the editor. Or even that the DMO’s Chief Executive did not bother to elaborate on some stronger objection. Fine: but please could we be told, because the arguments as presented fail to engage, let alone convince.

Julian D. A. Wiseman, New York
Tuesday 25th November 2008


†1: Gilt Asset Swaps: DMO Should Profit, October 2008, and also Who pays wins: a reply to Mark Capleton, November 2008, the latter replying to Who pays wins (in several ways), Mark Capleton, 18th November 2008.

†2: GBP Swaps: Stheeman wary of DMO swap talk, 24th November 2008, which refers to an earlier article GBP Swaps: DMO should pay long-dated swaps, 13th November 2008. A Total Derivatives password is needed, sometimes obtainable by asking nicely.

†3: Libor+50bp actually implies an expected life a good deal shorter than two centuries, depending on how much credit risk is presumed to be in Libor. If six-month Libor, over the term of the swap, averages 75bp of credit, then the expected life drops to eighty years—an even worse signal for HMT to be sending.


This page was discussed by Total Derivatives on Friday 28th November 2008 in a report entitled GBP Bonds: DMO and swaps – where next?.

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