(Bloomberg) — The UK is planning one of its biggest annual borrowing sprees on record to fund government spending.
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The Debt Management Office said Wednesday it will issue £265.3 billion ($338 billion) of gilts, close to the £258 billion estimated by banks in a Bloomberg survey. That’s the biggest-ever annual target — excluding the emergency financing that followed the pandemic in 2020.
The government is tilting bond sales further away from long-dated securities as it looks to soften the blow on investors, already stretched by a glut of issuance in recent years. Long-maturity bonds will make up 18.5% of issuance, compared to 21.1% last year, the DMO said.
The shift accounts for waning appetite for the securities from traditional buyers, including pension funds, and promises to provide some relief for the worst-performing major bond market so far in 2024.
Gilts erased losses after the announcement, with notes across the curve trading marginally higher on the day. The 10-year yield fell 2 basis points to close at 3.99%.
The DMO has been reducing the share of long-dated bonds amid dwindling demand from liability-driven investors such as pension funds, which need fewer long and inflation-linked debt to pay out their obligations now that interest-rates are higher. Market participants in an annual Treasury meeting showed “strong support” for the shift, which has also been signaled by outgoing Chief Executive Robert Stheeman.
The funding package carries extra importance for the market given sales from the central bank are also in full swing. If the BOE maintains its yearly target of reducing its gilt stockpile by £100 billion, the total stock of debt the market will have to digest this year is on course climb to an all-time high, according to banks including RBC Capital Markets and Citigroup Inc.
“This is a big number,” the DMO’s Stheeman said. “We have to acknowledge that.”
Earlier Wednesday, the Chancellor of the Exchequer Jeremy Hunt announced a two-percentage point cut to the UK’s national insurance payroll tax, noting growth is due to be stronger than previously forecast.
The Conservative administration is seeking to close a significant gap in polls versus the opposition Labour Party ahead of a general election expected later this year, and some investors were bracing for inflationary give-aways that risk delaying monetary easing from the Bank of England.
“In today’s budget and the new gilt remit there should not be anything to scare the horses,” said James Lynch, fixed income investment manager at Aegon Asset Management.
Retail Bonds
UK bonds have underperformed this year as investors scaled back the number of interest-rate cuts they expect from the BOE aggressively. The yield on 10-year bonds is up around 50 basis points this year, the most among major peers tracked by Bloomberg.
Hunt also announced a new three-year fixed-rate retail bond through the state-owned National Savings and Investments bank, to go on sale in early April. Such securities were last sold in 2019 and NS&I said the intention is to have them available for an extended period of time.
Governments across the region are tapping burgeoning demand from retail investors to diversify their funding base in light of higher financing costs, large spending plans and the withdrawal of central bank support.
The DMO said it plans to sell:
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£95.3 billion of short-maturity bonds, or 35.9%; that compares to 36.0% in March 2023
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£82.1 billion of medium-maturity bonds, or 30.9%; compares to 27.1% last year
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£49.0 billion of long-maturity bonds, or 18.5%; compares to 21.1% last year
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£28.9 billion of inflation-linked bonds, or 10.9%; compares to 10.9% last year
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£10.0 billion in the DMO’s unallocated bucket, or 3.8%; compares to 5.0% last year
–With assistance from Naomi Tajitsu.
(Adds 10-year gilt yield in fifth paragraph.)
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