Bond market prepares for increase in UK debt issuance of £300bn by this year

Global investment banks are expecting UK debt sales to reach £300bn this year, the second highest on record. The government is preparing for a showdown against bond investors during this week’s Budget.

Gilts could have their worst month in April, as recent selling is fueled by unease about a proposed loosening up of borrowing rules for the country. The benchmark 10-year bond yield rose to as high as 4,29 per cent Monday, the highest level since early July. It then fell back down to 4.25 percent.

According to an average forecast of seven big investment banks, analysts expect that the Treasury will increase its net financing requirement from £278bn to £298bn for the year ending March 2025.

This would be the largest ever borrowing, except for the massive debt purchased by the Bank of England in 2020-21 when Covid’s emergency schemes were funded. The debt issuance, net of redemptions (old gilts being paid back), is expected to reach £158bn. This would be the third highest amount ever recorded after the borrowing spikes following the pandemic in 2008-09 and the global financial crisis.

Budget is the most important event for the new Labour government in the UK. It says that it must plug a £40bn hole in the public finances of the country and invest in public services and infrastructure.

The government also plans to borrow in order to achieve its goals, at a moment when tax revenue is on its way to reaching its highest percentage of GDP for decades.

Investors will be updating their estimates for gilt issuance in the future years after chancellor Rachel Reeves announced that the government was changing its debt rules to allow more investment.

People briefed on the Budget discussions say that the government will move to a wider gauge of its net liabilities (public sector net financial obligations) which will allow it to borrow up to tens billions more pounds in the future without exceeding its long-term target.

Rob Burrows is a manager of a government bonds fund at M&G Investments. He said that the government must now give investors the confidence that “guardrails” are in place so that money won’t be wasted.

Bond investors are also looking for any indications of how the additional £50bn per year created by changes in fiscal rules will be spent.

The market views this Budget as being a significant one because it marks a break from the past, said Moyeen, a fixed income strategist at Barclays. He was referring both to the fiscal rules change and what he termed the “attempt” to “reestablish UK’s fiscal credential” following the disastrous mini-Budget of former Prime Minister Liz Truss in 2022.

Islam said that “the issuance of gilts is still a challenge in the medium-term”, with “issuances exceeding £250bn to £270bn” “becoming the standard”.

Citi analysts warned last week in a report that “risks for gilts are far from over”, despite the fact that “bad news” implied by the new fiscal rules for bondholders was “out the way”.

There is still the possibility of a relief rally if investors find the borrowing plans conservative enough.

Peder Beck Friis, economist with bond fund group Pimco said that he expects the “lingering premium” on gilts to diminish over time, as investors shift their attention from laxer fiscal rules to “a decreasing deficit, an easing of inflation, and softer labour market conditions”.