The UK bond market is pushing for fewer long-dated gilts to be sold in 2025 due to shifting demand, with investors favoring short-term bonds amid rising borrowing costs.
The UK bond market is urging the government to reconsider its strategy for issuing long-dated gilts in the upcoming fiscal year, following a shift in demand for government debt amid rising borrowing costs. According to minutes from an annual consultation meeting held on Monday, dealers have voiced strong support for reducing the issuance of long-term gilts, particularly as pension funds and insurers, the traditional buyers of these bonds, have been scaling back their demand.
The consultation, chaired by the Economic Secretary to the Treasury, comes at a critical time as the UK faces the challenge of meeting its second-largest borrowing target on record for the 2024-2025 fiscal year. The minutes revealed that most investors are now pushing for more short-dated debt issuance, as longer-term bonds have become less appealing due to the surge in interest rates.
The UK government is set to sell bonds maturing in 2040 via syndication in the near future, a move that reflects the continuing pressure to raise significant funds despite the backdrop of rising yields. With the Bank of England’s bond portfolio, acquired during the period of low borrowing costs, expected to be auctioned off in the coming years, supply of gilts is projected to remain high.
The higher borrowing costs in the UK, which reflect broader global interest rate trends, are complicating efforts to meet fiscal targets. The Labour government’s fiscal rules require the UK to be on track to cover day-to-day spending with tax revenues by 2029-30, a target that may necessitate fiscal tightening or spending cuts.
The call for fewer long-dated gilts is part of a longer-term trend as the UK’s bond market evolves. The market is seeing reduced demand for long-term bonds from pension funds and other institutional investors, which had traditionally relied on these assets to match their liabilities. In response to market uncertainty, there is also a push for an increased “unallocated” bucket of issuance, which would give the Debt Management Office more flexibility in deciding the maturity of gilts to be sold.
Investors have also expressed a desire for more regular use of gilt tenders, which could provide off-the-run, low-coupon gilts that are attractive to wealthy private investors and institutional fund managers. These securities are valued for their tax advantages and their higher sensitivity to interest rate changes, making them a useful tool for adjusting portfolio risk.
