UK Bonds Jump as Government Plans Fewer Bond Sales Than Expected

(Bloomberg) — UK bonds surged after the government said it will sell fewer bonds than markets expected in the next fiscal year, and sharply reduced the share of long-maturity debt.

Thirty-year securities led gains, with the yield falling nine basis points to 5.29%. The Debt Management Office said Wednesday it will sell £299.2 billion ($385 billion) of bonds in the fiscal year starting April, slightly less than the £302 billion estimated by banks in a Bloomberg survey.

That’s still £2 billion more than what’s planned for the current fiscal year and the most since a borrowing splurge across 2020-2021 aimed at softening the economic fallout from the pandemic. What’s more, investors expect the sales plan to be revised higher in April due to recent budget deficit data that overshot forecasts.

“The gilt remit number comes as a slight surprise, but following Friday’s spending data we probably expect that number to move higher,” said Matthew Amis, investment manager at Aberdeen. “The reduction in issuance in longs makes a lot of sense and was an open goal.”

The bond plan was released after Chancellor of the Exchequer Rachel Reeves told lawmakers on Wednesday she has entirely rebuilt the UK’s budget buffer with a series of spending cuts. At the same time, she said that she would increase capital investment by an average of £2 billion per year compared with her statement in October in order to drive growth “and deliver in full our vital commitments on defense.” 

The government continues to tilt the bonds on offer further away from long-dated securities — something gilt investors and dealers had requested it do.

Longer debt makes up 13.4% of the DMO’s latest plan, compared with 18.5% in the equivalent announcement a year ago. That’s the smallest share in a Spring Budget in the DMO’s 27-year history and comes in lower than banks’ expectation of a 17.2% share, according to the Bloomberg survey. 

Demand for longer debt from pension funds and insurers looking for assets to match against their long-term liabilities has been waning since interest rates shifted higher, a significant change after decades of near-insatiable buying.

What our strategists are saying…

“The Debt Management Office may have seemingly come to the rescue of the Treasury but the Office for Budget Responsibility projections may yet come to hurt gilts beyond the short term. … Long-dated issuance will amount to £40.2 billion in the 2025/26 fiscal year — far less than the £52 billion the markets have been expecting. Beyond the debt sales, though, there isn’t much for markets to cheer.”

—Ven Ram, Cross-Assets Strategist, Dubai

The DMO’s job has become more challenging since yields surged globally following the pandemic, and as the amount officials need to raise increases year after year. The task is more daunting now that the Bank of England no longer scoops up bonds to support the market, and is winding down its portfolio instead.

To be sure, the DMO also increased the size of its so-called unallocated bucket of debt sales — which it can use to adjust the tilt of its program throughout the year. The share stood at 9.2%, more than the 5% predicted in the Bloomberg survey, and offering plenty of scope for sales of longer-dated notes to increase as the year progresses.

“That has to find a home somewhere during the year,” said James Lynch, a portfolio manager at Aegon in Edinburgh. “I would not be surprised by the end of the fiscal year if the long allocation increases.” 

The DMO said it plans to sell:

–With assistance from James Hirai.

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