Recommendation 9

HM Government Rejected

Monitoring gilt market sentiment (recommendations in paragraph 9) The Bank publishes the aggregate gilt market participant demand and results of all of its QT auctions, including offers received for each gilt available for sale, total amount of the auction allocated to each gilt, and details on the pricing for each gilt. This gives a high degree of transparency to the market on the level of demand for the gilts sold from the APF. These results are made available shortly after the end of each auction and are published on the Bank’s website. In addition, the Bank regularly gathers market intelligence in support of the MPC’s remit for monetary policy, and regularly surveys a broad set of market participants through the Market Participants Survey (MaPS).2021 The results of this survey give some indicators to market expectations across a range of issues, including market participants’ expectations for gilt yields. As a starting point, I would like to say how welcome it is that the Committee has given careful consideration to the coming years and the potential challenges facing our work at the DMO. In responding to your recommendation, I would like to draw a distinction between demand and sentiment as I believe different considerations are relevant in the event of official updates on those topics. In relation to participant demand, we take a twofold approach. First, and very much to your point, we consider it absolutely fundamental to the good functioning of the market that official operations (primarily our gilt auctions) should be ‘public’ events that allow the market to see and understand the demand and supply dynamics applying at the point at which each auction takes place. After all, notwithstanding the good and ready availability of price data in today’s markets, our auctions will tend to occasion some of the larger flows in the market and, therefore, have particular salience. For that reason, following each of our auctions, we publish results statistics which are carefully designed to share with the market the information relevant to understand demand conditions at the aggregate level, while duly preserving the confidentiality of participant bidding, which is essential given auctions are a competitive market mechanism. Second, we fully concur that it is important that we, and the government more broadly, should publish material regularly about the factors–including demand–that inform decisions about the design of the financing programme. I would like to emphasise that the DMO’s financing remit is designed and implemented in pursuit of the Government’s debt management policy objective, which focuses on minimising, over the long term, the costs of meeting the government’s financing needs, taking into account risk. The debt management objective is achieved, in part, by meeting the principles of openness, transparency and predictability. This allows the financing programme to be set out for the year ahead and implemented in a programmatic way: by ensuring the market’s demand dynamics will be fully informed about the impending supply profile, there is no need for the market to levy an unpredictability risk premium on government (e.g. by ‘charging’ a higher yield in response to unpredictable supply patterns). In accordance with these principles, and particularly in relation to the principle of transparency, the DMO currently publishes regularly a range of reports and data that serve to update stakeholders on matters relating to gilt market demand and the financing remit. I have set these out in the annex to this letter. However, and turning now to the subject of sentiment, the DMO deliberately does not publish its own views on market sentiment, although we report regularly, in summary form, opinions provided by market stakeholders concerning demand and market conditions (please see the annex). The reason for not publishing DMO opinions about market sentiment is because we believe doing so could be counterproductive, given that the DMO is a major official sector participant in the gilt market and, as such, there is a material risk that any opinions expressed by the DMO could themselves impact market sentiment and/or jeopardise our achievement of the debt management task in a potentially negative way. For example, if we were to publish a concern that market sentiment was unpropitious, the market might read into this that we would be more tolerant of accepting very low prices at an auction and adjust their bids accordingly. Furthermore, consistent with the programmatic approach outlined above, it is the DMO’s role essentially to act as a price taker in the gilt market, which also accords with the absence of any mandate to attempt to set or influence prices or yields. In that context, we would not want to introduce the possibility that we might inadvertently influence, or be seen to be attempting to influence, market behaviour (including prices and/or yields) as a result of publishing opinions about market sentiment