The Bank of England's bond-buying programme is the main factor supporting the market for UK government bonds at the moment, rather than investors' outright bullish stance towards gilts, the chief debt manager said on Tuesday.
Gilt yields have plumbed record lows in recent weeks, with 10-year yields falling below that of German benchmark Bunds for the first time in nearly three years, as investors sought a safe haven on worries the euro zone cannot resolve its debt crisis.
The Conservative-led coalition government has been quick to take the credit for gilts' safe-haven status, saying it reflects markets' confidence in its deficit-cutting plans.
However, speaking after Chancellor George Osborne was forced to revise up his borrowing plans for the coming years, Debt Management Office chief executive Robert Stheeman acknowledged gilts only looked safe because investors were more worried about other regions.
We appear to be perceived relatively favourably compared to other markets, he told Reuters.
That doesn't mean we're necessarily seen as the best. It's more an issue that other markets currently seem to be viewed as less attractive, relative to the UK, he said.
Stheeman's comments came after the government ramped up its borrowing estimates over five years due to a much weaker growth outlook, and lifted gilt issuance by more than 11 billion pounds this fiscal year to 178.9 billion pounds.
The DMO will hold two additional auctions to sell the extra gilts, and raise issuance of medium-dated bonds by 5.1 billion pounds. Stheeman said that was where demand was concentrated at the moment.
He said ultra-loose monetary policy was a significant factor propping up demand for UK government bonds.
One factor which looks to be supporting gilts right now, in particular, is very accommodative monetary policy. I don't expect to see much in the way of a change in monetary policy in the near future.
The BoE restarted its quantitative easing programme to purchase gilts in October with a 75 billion pound cash injection aimed at preventing the economy from falling back into recession.
The central bank is expected to inject a further 75 billion pounds when the current programme runs out in February in response to a rapidly deteriorating outlook for the euro zone, according to a Reuters poll on Tuesday.
Expectations that the central bank will keep buying gilts and outweigh the extra gilt supply, helped to push the yield on 10-year government bonds down around 9 basis points below that on the equivalent German Bund -- the biggest premium of gilts over German government bonds in 2-1/2 years.
Stheeman urged caution about making too much of the move, however, noting that Britain was likely to have to issue much more debt in the years to come.
We're not trying to flaunt our safe-haven status. We still have a large borrowing requirement, and we're going to have significant borrowing requirements in the coming years as well.
(Reporting by Fiona Shaikh; Editing by Susan Fenton)