Managing the UK National Debt November 2017

Transcription

1 Managing the UK National Debt Martin Ellison University of Oxford and CEPR Andrew Scott London Business School and CEPR November 217 National Debt November / 23

2 What s new? New database of monthly price and quantity of individual UK gilts Should the government issue short or long debt? National Debt November / 23

3 Debt to GDP ratio Outstanding value of marketable debt 3 2 Total debt Marketable debt National Debt November / 23

4 Market/Par Value Market and par value of debt National Debt November / 23

5 Share Composition by maturity < 1 year Ultra short < 3 years Short 3 7 years Medium 8 15 years Long > 15 years Consols National Debt November / 23

6 Issuance (a) Number of gilts outstanding (a) Number of gilts outstanding (b) Number of gilts issued and retired Issued Retired (b) Number of gilts issued and retired (c) Average size of each outstanding gilt relative to GDP Issued Retired (c) Average size of each outstanding gilt relative to GDP National Debt November / 23

7 Structure Maturity Martin Ellison and Andrew Scott Managing the UK()National Debt November / 23

8 Debt management policy The DMO s remit is to carry out the Government s debt management policy of minimising financing costs over the long term, taking account of risk, and to minimise the cost of offsetting the Government s net cash flows over time, while operating in a risk appetite approved by Ministers in both cases. National Debt November / 23

9 Long or short? What does issuance imply for the... macroeconomy? primary deficit? yield curve? debt levels? Counterfactuals National Debt November / 23

10 Costs and risk Measure costs by holding returns and liquidity effects Risk depends on quantity issued and volatility of yield curve Quantify risk using Value at Risk (VaR) measure Face value of issuance decided in advance Receipts depend on market price 5% VaR measures shortfall in receipts with probability.5 National Debt November / 23

11 VaR 15 Market value of outstanding debt VaR National Debt November / 23

12 Average VaR Average VaR Simple counterfactuals without liquidity effects 3 (a) One maturity strategy 3 (b) Two maturity stra Average debt GDP Average debt GD National Debt November / 23

13 Average VaR A debt management frontier Av erage debt GDP Minimum at 9 years National Debt November / 23

14 Average VaR Multiple maturities One maturity strategy 1.3 Two maturity strategy Three maturity strategy Av erage debt GDP Minimum at 65% short (37 months) and 35% long (15 months) National Debt November / 23

15 Average VaR Could we have done better? Data One maturity strategy 1.3 Two maturity strategy Three maturity strategy Av erage debt GDP National Debt November / 23

16 Average VaR Liquidity effects x=bp x=1bp x=3bp Data Av erage debt GDP National Debt November / 23

17 Is a liquidity premium of 85bp large? Average one period holding return on 3 year bonds is 5.3% Average issuance of 3 year bonds is.8% of GDP Average issuance of 3 year bonds in counterfactual is 15.2% of GDP Doubling of issuance should raise yields by no more than 4.9bp Breedon and Turner (216) use estimates from QE to argue that doubling issuance raises yields by 2.3bp National Debt November / 23

18 Recently Preference for long bonds to lock in at low rates Had the UK since 21 issued only three year bonds then market value of debt today would be 9% of GDP lower National Debt November / 23

19 National Debt November / 23

20 Revaluation of Consol Revaluation of Consol Fiscal insurance (a) Primary deficit v s Rev aluation (b) Response to a primary deficit shock Primary deficit Years National Debt November / 23

21 Wars Wars Peace Nominal return on bonds 3.7% 4.7% Real return on bonds.7% 3.1% National Debt November / 23

22 Financial crises Crises Normal Nominal return on bonds 4.4%.4% Real return on bonds 4.7%.2% National Debt November / 23

23 End year Subsamples year bonds best 5 year bonds best 1 year bonds best Start year National Debt November / 23