September 26, 2012 / 1:12 PM / 5 years ago

ECB bond plan may dim gilt charm: UK debt head

LONDON (Reuters) - A plan by the European Central Bank to buy the sovereign bonds of stricken euro zone countries could reduce the safe-haven appeal of gilts though it has not done so yet, Britain’s chief debt issuer said on Wednesday.

“There could be a fading of what I would call, bluntly, the panic-buying,” Debt Management Office chief executive Robert Stheeman told Reuters on the sidelines of the Euromoney Sterling Conference.

“It could. I don’t think that’s really happened yet,” he said when asked whether gilts’ safe-haven appeal had ebbed as a result of the ECB scheme, unveiled earlier this month but not activated so far.

Investors have been piling money into the perceived safety of British government bonds as they try to avoid the risks from the euro zone debt crisis, driving gilt yields down to record lows despite the country’s own huge budget deficit.

Stheeman said gilts’ safe-haven status was unlikely to disappear completely given the government’s austerity plan aimed at erasing the deficit and the Bank of England’s quantitative easing gilt purchases to support the recession-hit economy.

The central bank has been pumping newly-created money into the fragile economy by buying British government bonds, with total purchases set to reach 375 billion pounds in November.

Stheeman told the conference participants earlier that the gilt market had not been disrupted by this large-scale quantitative easing program.

RPI CHANGES

There could be some disruption in the short term in the index-linked gilt market if some of the proposed changes to the way a key measure of inflation is calculated are implemented, Stheeman told Reuters.

“There could be some disruption in some of these hypothetical situations ... In the short run, I accept that that’s possible,” he said.

The Office for National Statistics has flagged proposals to reform the retail price index, used to calculate returns on index-linked gilts. Three of its four suggestions would lead to a rate of RPI that is closer to the typically lower consumer price index measure, potentially harming investors.

However, Stheeman added: “If some experts decide that it is in their view necessary to alter the (RPI) methodology in order for the quality of the statistics to remain exceptionally high, I don’t think that should undermine the market, it should give the market confidence in the long run.”

After a consultation, the ONS plans to make recommendations in January, with a view to them taking effect in March.

The final decision is likely to be in finance minister George Osborne’s hands as he is legally required to give his blessing if the changes decided upon are judged by the BoE to be harmful to bondholders.

But Stheeman said that beyond that ministers had no role to play in the RPI changes.

“The discussions about potential changes to the RPI are driven purely by the ONS’s remit to produce the highest-quality national statistics,” he said at the conference.

Some analysts have pointed out that a change could save the government billions in interest payments, making it tempting in times of large deficits.

Stheeman stressed that the DMO remained committed to issuing index-linked gilts, noting that in both the 2011-12 financial year and the current year linkers accounted for around 22 percent of all British government debt issuance.

Editing by Stephen Nisbet

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