Illiquidity - size of issue

48.  The 5 largest Gilt issues in the market at the time the GGBs were issued were:

It has been the policy of the DMO to concentrate issuance on a few benchmark issues, some of which may also have special characteristics such as being strippable. Gilts are also subject to the special relationship between the DMO and Gilt Edged Market Makers (GEMMS). Even if a quasi-Gilt, with these privileges had been issued, it can be seen that it would have been too small to trade in line with the major issues in the Gilt market. The Figures in Annex 3 illustrate that small issues of Gilts trade at a discount to the large benchmark issues.

49.  Once the decision had been made to issue Eurobonds, it was inevitable that they would be issued at a further spread premium to Gilts. However, would it have been possible to issue the GGBs as a single tranche to obtain greater liquidity? Given the final corporate Eurobond structure, we do not believe there would have been sufficient demand for a single £2,650 million tranche. Investors will have more restrictive exposure limits on corporate bonds than Gilts. Therefore, although a small issue will be illiquid and trade at a spread premium, there is also a spread premium for volume. When placing large amounts of bonds on a single day it is therefore necessary to access as many investors as possible and this tends to be achieved by selling the bonds in various maturity tranches (cf. FRESH/Annington Homes). The long GGBs were issued in two tranches reflecting the relative demand for each maturity.