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Global investment banks expect UK debt sales this year to rise close to £300bn, the second-highest on record, as the government heads for a showdown with bond investors at this week’s Budget.
Gilts are on track for their worst month since April as unease over a proposed loosening of the country’s borrowing rules adds fuel to a recent sell-off. The benchmark 10-year gilt yield climbed as high as 4.29 per cent on Monday, its highest since early July, before falling back to 4.20 per cent.
Analysts at big investment banks expect the Treasury to increase its so-called net financing requirement for the year to March 2025 to £298bn, from the current figure of £278bn, according to the average of seven investment bank forecasts gathered by the Financial Times.
That figure would be the highest ever apart from the extraordinary borrowing in 2020-21 to fund Covid emergency schemes, a time when the Bank of England was a heavy buyer of the debt. Debt issuance net of redemptions — old gilts being repaid — is forecast to rise to £158bn, the third-highest on record after the borrowing spikes that followed the pandemic and the 2008-09 global financial crisis.
The Budget is the biggest event so far for the UK’s new Labour government, which says it needs to plug a £40bn gap in the country’s public finances and invest in infrastructure and public services.
The government is also planning to borrow to meet its goals at a time when the tax take is heading to its highest proportion of GDP in decades.
As well as the closely watched borrowing requirement for the current fiscal year, investors will also be updating their estimates of gilt issuance for the coming years, after chancellor Rachel Reeves confirmed last week that the government would change its debt rule to permit more investment.
According to people briefed on Budget discussions, the government is set to move to a broader gauge of its net debt — public sector net financial liabilities — which will allow the government to borrow tens of billions of pounds more in future years without breaching its long-term targets.
Rob Burrows, a government bond fund manager at M&G Investments, said the government now had to give investors confidence that “the guardrails are in place to make sure that the money isn’t squandered”.
Bond investors will also be looking for any indication of how much of the extra £50bn a year in headroom created by the changes to fiscal rules will ultimately be used.
“The market sees this as a really important Budget in that it represents a break with the past,” said Moyeen Islam, a fixed-income strategist at Barclays, referring to both the change to fiscal rules but also what he called the “attempt to reestablish the UK’s fiscal credentials” after former Prime Minister Liz Truss’s disastrous mini-Budget in 2022.
Over the medium term, “the gilt issuance numbers do remain really challenging”, Islam added, with issuance in excess of £250bn-£270bn “becoming the norm”.
Analysts at Citi warned in a note last week that the “risk for gilts is far from over”, even if the “bad news” for bondholders implied by the new fiscal rule was “out of the way”.
But there remains the chance of a relief rally on Budget day if investors deem the borrowing plans sufficiently conservative.
Peder Beck-Friis, economist at bond fund group Pimco, said he expected the “lingering risk premium” in gilts to fade over time as investors move their focus from looser fiscal rules to “a declining deficit, easing inflation and softening labour market conditions”.