Responsibility for these funds is taken over by insurers once a fund reaches a stage known as “buyout”. However, different regulations in the insurance industry means they do not need as many gilts and many are likely to sell. As a result, the Government will be issuing new debt at a time when there’s a glut of gilts on the market.
Analysis presented to the Bank and DMO suggested that DB schemes were likely to stop being net buyers of bonds within the next few years as a result.
The Bank of England is also offloading long-dated debt at a pace of around £2bn each quarter, adding yet more supply.
Demand for UK debt has been strong in recent months, with a recent auction almost three times oversubscribed. City sources said that while demand for long-dated debt may continue to be strong in the coming year as pension funds continue to de-risk, the UK faced a debt crunch later as that demand dried up.
Imogen Bachra, a senior rates strategist at NatWest, said the DMO was likely to be “very careful” to avoid the risk of a failed auction but added that she “shared concerns” about waning demand.
Ms Bachra said: “I think the risk is more that the long end remains quite cheap because all of that supply is coming against the backdrop of changed demand at the long end.
“The DMO has long been able to rely on pension funds to absorb all of its issuance essentially. I think that’s different now.”
The DMO declined to comment.
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