By David Milliken
LONDON (Reuters) - Strong demand at recent British government bond auctions has not ended the risk of investors temporarily losing their appetite for new debt, the man responsible for financing Britain's budget deficit said on Wednesday.
The chief executive of the UK Debt Management Office, Robert Stheeman, told Reuters he stood by comments he made last month about the increased risk of a first failed bond auction since 2009, despite a surge in investor appetite at recent sales.
"The fact that we have just had a couple of auctions that have done very well does not mask the underlying issue of reduced balance sheet capacity in the banking sector, and reduced risk appetite," he said in an interview.
"We may have moved from famine to feast very recently, but we could also move back again. I'm expecting to see a little more of these binary type of outcomes over the next 12 months."
A sale of 30-year gilts (GB30YT=RR) on Tuesday drew the strongest demand for a British conventional sovereign bond so far this year, as 10-year gilts saw their strongest rally in more than three years on the back of fears over Greece.
"Safe-haven flows are reasserting themselves as a factor in the market," Stheeman said.
Gilts also gained from the sell-off in Chinese shares and a slide in oil prices, factors which could easily reverse themselves, he said.
Gilts fell heavily on Wednesday, largely due to a slight improvement in sentiment over Greece, but also because the DMO trimmed its plans for gilt sales this year by less than dealers had expected after finance minister George Osborne's post-election budget statement.
The DMO cut gilt issuance by just 3.5 billion pounds ($5.37 billion) to 127.4 billion, while it said it would reduce the net stock of short-dated Treasury bills by 10.5 billion pounds.
Stheeman said the DMO had wanted to stick with its practice of using changes in T-bill issuance, not gilt sales, to accommodate changes in budget plans during the year.
"Had we taken a much larger reduction in gilt sales, we may have needed to look at cancelling auctions, cancelling syndications, which we thought would not be hugely helpful to the market," he said.
Stheeman said he hoped gilt investors would take into account the downward revisions to projections of government borrowing needs for future years.
Some gilt dealers had said they expected the DMO to shift away from its practice of using T-bill issuance as a fine-tuning tool this time, due to the unusual timing of the budget and the possibility more fine-tuning would be needed later after the sale of government shares in Lloyds (L:LLOY), RBS (L:RBS) and Royal Mail (L:RMG).
($1 = 0.6514 pounds)