The Bond Market Secret Agent Who Raised £3 Trillion for Britain

(Bloomberg) - Robert Stheeman, a 20-year-old intern at a now-defunct German bank, got his first job operating an industrial paper cutter that sliced coupons, sometimes as thick as 500 pages, from bond certificates.

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This role set the stage for a career that would see him rise to the top of the UK bond market, overseeing the largest public sector borrowing in a generation.

Few people in British finance are as accomplished and enduring as Stearman, who will have raised more than £3 trillion (about $3.8 trillion) for the United Kingdom by the time he steps down from his 21-year-long role as head of the Debt Office. For some London bond traders, he was "the most important person the average person has never heard of".

Now that Stillman is ready to retire, he says the challenge facing his as-yet-undeclared successor is how to ensure the liquidity and stability of the markets he helped create.

This task is becoming increasingly complex as the UK prepares to raise yet more debt this year, totaling about £265 billion, and as the central bank sells off the gilts it bought under quantitative easing. All this debt needs to find a buyer as governments around the world compete to issue bonds.

"That's why market flexibility is so important," Stheeman said in an interview.

This resilience can be seen in several ways. First, there is the balance between how much money the government needs to raise and how it is acceptable to investors, whose preferences for short- and long-term debt are constantly changing. It is also about ensuring the loyalty of a specific group of investment banks known as "gilt-edged market makers," even as hedge funds, algorithmic traders, and other types of investors gain a larger share of the market.

The Office of Debt Management acted as an intermediary, translating spending plans from the Treasury into the specific details of the bond sale. Separated from the Bank of England in 1998, the department had no say in fiscal policy and worked behind the scenes to select the maturities of the bonds to be sold and to ensure that the auctions went smoothly.

Bankers who have worked with Stearman recognize him as being very calm under pressure. Deutsche Bank's Neal Ganatra said he helped instill confidence in the market, while Sam Hill of Lloyds Banking Group's LBCM division praised his "robust, predictable" approach to bond issuance.

British Prime Minister Liz Truss's unfunded tax cuts have triggered one of the biggest fluctuations in the gilt market's history, and as a result, Steynman has a front-row seat to the 2022 turmoil. For future politicians, he warns of the risks of a negligent market.

"The market," says Stheeman, "is not something you can force to accept your point of view." Ultimately, policymakers and politicians need to consider the market's point of view. There is no point in criticizing that view.

The issue resonates considering the massive debt burden of the United States and the debate over whether the Trump era's all-you-can-eat tax cuts, which are set to expire at the end of 2025, will be extended. Last month, Phillip Swagel, director of the Congressional Budget Office, warned in an interview with the Financial Times that the U.S. would be at risk of a Trump-type market shock if the U.S. government ignored the rising level of federal debt.

Treasury Secretary Janet Yellen and others have argued that additional borrowing is manageable because, at least so far, the larger public debt burden hasn't created much of an interest burden.

The UK government will also ask investors to buy more bonds. The FGB's fundraising target for 2024 is the largest ever - excluding emergency funding after the 2020 pandemic.

With so many bonds to sell, Steynman's successor would have to make the difficult decision of keeping the British treasury full without paying out too much money. It's a lesson Steynman himself learned after just a few years at DMO, when the collapse of Lehman Brothers was disrupting the market.

Later, at the height of the financial crisis, his office rejected a series of low-priced orders placed by investors in a UK debt auction on the grounds that they were of little value to the taxpayer, and that so-called auction failure in March 2009 triggered a plunge in gilts that exacerbated the most turbulent period for UK debt in a decade, and led to the Prime Minister issuing a statement defending the market's fundamentals. Sturman was asked to write to the government to explain his decision, saying his aim was to protect the British taxpayer.

Even after all these years, this little episode still rankles Stillman, as it was the only auction mishap that ever happened on his watch.

"It was necessary," he reflected." It was a very, very stressful day. But at the end of the day, I left the office without any pain."

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