Long-dated gilt issuance to be reduced, easing debt market pressure
The UK will be issuing fewer longer-dated bonds, helping to ease pressures in the 30-year gilt market which has been hit by concerns over public finances and fiscal policy.
The Debt Management Office, the body that issues bonds on behalf of the Treasury, will skew its gilt issuance for next year towards shorter-dated debt after the announcement in the budget that debt would increase in the coming two years.
The DMO said the long-dated gilts would make up about 9.5 per cent of the newly issued debt, compared with 20 per cent announced in March.
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The UK has been steadily moving towards shorter debt issuance as buyers of long-term bonds, such as defined benefit pension funds, are no long significant holders of 30-year gilts.
Longer-maturity debt has suffered from the sharpest sell-off in the gilt market this year, with yields hitting the highest levels in 20 years. Traders have sold the assets over worries about the UK’s long-term debt sustainability and due to the increased supply from sales made by the Bank of England.
Gilts rallied after the budget, in which Rachel Reeves announced £28 billion of tax rises and measures to bring down consumer price inflation through lower energy and fuel bills. Bond investors also took encouragement from the DMO’s debt issuance, which will rise from £299.1 billion to £303.7 billion — lower than the £309 billion that City analysts had expected.
“Markets were reassured by the chancellor building in greater headroom and the Debt Management Office skewing towards shorter issuance,” Andrew Goodwin, chief UK economist at Oxford Economics, said.
Vanguard, an asset manager, told its clients that it was betting on the rising price of 30-year gilts over equivalent German debt “reflecting increased German supply and reduced UK long-end issuance”. The shift towards shorter-dated bonds should also “gradually reduce the elevated risk premium at the long end [of the gilt market],” Ales Koutny, head of international rates at Vanguard Europe, said.
Gilt prices rose again on Friday, pushing down the yield on ten-year bonds by 0.02 percentage points to 4.44 per cent and by 0.01 percentage point on 30-year bonds to 5.2 per cent. Yields on 30-year bonds have fallen from a peak of 5.7 per cent in September. Yields fall when bond prices rise.
The UK has the highest average debt maturity of any large economy in recent years, helping protect the government from rising interest rates. Moving towards shorter-dated debt is designed to encourage more participants into the gilt market.
The government is also considering expanding the shortest-dated debt, known as Treasury bills, to diversify bondholders and potentially create a market for assets to be held by investors with pound-backed stablecoins. The DMO said it would launch a consultation on developing a T-bill markets at the start of the year.
“The government is committed to maintaining as diversified an investor base as possible, to enhance the resilience of the government’s financing programme,” the DMO said. “Any changes following the consultation will take into account an assessment of cost and risk, including implications for the government’s refinancing risk exposure.”
