UK Poised to Increase Heavy Gilt Sales in Upcoming Financial Year

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The UK government is poised to increase its issuance of government bonds in the upcoming financial year, reflecting the need to address maturing gilts and the fiscal constraints faced by Finance Minister Jeremy Hunt, who is expected to announce the budget on Wednesday.

Hunt aims to bolster Prime Minister Rishi Sunak’s standing by considering tax cuts in the pre-election tax and spending statement. However, he must tread carefully to avoid exacerbating concerns among bond investors regarding the country’s public finances. The price of British government borrowing has already fallen more than that of peers, and significant amounts of debt are scheduled to hit the market.

A Reuters poll among primary dealers suggests a median forecast of £258.4 billion in gilt issuance for the 2024/25 financial year, up from £237.3 billion in the previous year. This projection, if realized, would mark the second-heaviest year for issuance on record after the 2020/21 financial year, which was heavily impacted by the coronavirus pandemic.

The increase in issuance primarily reflects the rising volume of maturing gilts that need replacement, expected to reach £140 billion in 2024/25 compared to £117 billion in the previous year. It’s not primarily driven by expectations of major giveaways in Hunt’s budget announcement.

The heavy issuance plans are anticipated to exert pressure on British gilts, particularly given the Bank of England’s separate bond sales and weakening demand from pension funds for long-dated debt as part of its quantitative tightening program.

Nomura economists highlighted that the gilt market would absorb more bonds in 2023/24 and 2024/25 than in the previous nine years combined, considering the BoE’s quantitative easing and tightening policies.

The increased issuance is expected to lean towards short-dated bonds for the third consecutive year, with additional funding likely to come from increased T-bill issuance and National Savings and Investment (NS&I).