Bond Market Tells UK to Sell Fewer Long Gilts Amid Demand Shift

The UK bond market wants the government to sell fewer long-dated gilts next year as the country navigates shifting demand for its debt in the wake of a surge in borrowing costs.

Dealers expressed “strong support” for a reduction in the duration of gilt issuance in the 2025-26 fiscal year relative to current levels, according to the minutes from annual consultation meetings held on Monday. Most investors pushed for more short-dated issuance, citing waning demand for long bonds from pension funds, the minutes said.

The UK is set to meet its second-largest borrowing target on record this fiscal year and the consultation, chaired by the government’s Economic Secretary to the Treasury, came ahead of an expected sale by syndication of gilts maturing in 2040. 

Supply is expected to stay elevated for years, with additional sales potentially coming as the Bank of England auctions off the portfolio of bonds it bought in recent years to keep borrowing costs low. 

The challenge of meeting the fundraising target has been exacerbated by a rise in yields in recent months. 

Though largely a global move, higher rates have a bigger impact on policy in the UK and spending cuts are a possibility. The Labour government has a set of fiscal rules stipulating official forecasts must show the UK on track to cover day-to-day government spending with tax revenues by 2029/30.

The calls for fewer long gilts are part of a years-long trend. That’s because the traditional buyers — pension funds and insurers looking for assets to match against their liabilities — are reducing their demand for such maturities. 

Both dealers and investors also called for an increase in the “unallocated” bucket of issuance, which gives the nation’s Debt Management Office flexibility rather than pre-committing to a selling a certain maturity. That’s amid “uncertainty about market conditions,” the bankers said. 

There were also calls for more regular use of gilt tenders, with some investors advocating they be used to provide off-the-run, low-coupon gilts. These securities generally trade at more expensive levels of the curve because they offer tax advantages for wealthy private investors. 

They also appeal to institutional investors due to their higher sensitivity to moves in interest rates, allowing fund managers to adjust their portfolio risk more efficiently. 

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