T-Bills stake remains low for LAs

Despite the current high-risk environment local authority treasury officers are not being tempted to invest in UK government T-bills. The investments, which are paying around 0.5% over six months, are perceived as secure enough for LA short term holdings, but finance departments are finding better alternatives elsewhere.

At Somerset County Council finance director Alan Sanford favours money market funds. “We don’t have any gilts, we invest in money market funds and they invest in gilts so we don’t need to,” said Sanford. “You invest in these instruments, they provide the diversity and we take the yield.”

Another treasury manager said: “We have found that we can get a similar level of security to gilts but with a higher yield.”

“There isn’t any reason why we wouldn’t invest in gilts but it is not something that we currently do. The majority of our deposits are short-term sterling deposits with highly rated banks or local authorities.”

The perception, explained the manager, is that the semi-nationalised banks and other local authorities offer the same level of security as government debt, but have a better yield.

“There’s no way a local authority would be allowed to go down, and if they are offering a higher rate than a gilt it makes no sense to use gilts,” he said. “The semi-nationalised banks don’t have the same guarantee as gilts but ultimately the government wouldn’t allow their investment in them to be lost.”

However there are signs that uncertainty may lead to greater holding of UK government debt.

“We switched a lot of deposits from banks into t-bills at the end of October,” said East Herfordshire’s director of finance, Alan Madin. “We felt that there was a lot of uncertainty in the markets leading up to the Eurozone summits. We took £35m out of deposit and put that into UK short dated T bills – we felt the marginal loss of return going forward was worth it.”

According to government data local government held £239m in gilts as at the second quarter 2011 – a miniscule amount in comparison to many other holders.

The Bank of England currently holds nearly £198 billion, UK households £13 billion, foreign central banks £62billion and other overseas holders £323 billion. In both of the latter cases the amount is nearly double the UK government debt they held in Q2 2008.

At the Debt Management Office head of markets Joanne Perez said that local authorities were particularly
interested in government credit in 2008-9. “We’re now some way off that,” she said. International buyers have recently been coming into the UK government debt market, added Perez, which has been driving yields down.