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Bond traders expect the UK to present one of its biggest borrowing plans on record this week as Chancellor Rachel Reeves attempts to balance her government’s pledge to boost growth with calls for fiscal discipline.
The Debt Management Office on Wednesday (Oct 30) is expected to announce a £15 billion (S$25.7 billion) increase in gilt issuance for this fiscal year, according to the median estimates of 16 primary dealers. That will take total borrowing to £293 billion, the highest for any year other than 2020, which was skewed by the response to the pandemic.
The budget will be investors’ first glimpse into the new Labour administration’s bid to finance wide-ranging investments. It will also set the stage for years of large forecasted borrowing, with the government rolling over a debt pile that has ballooned in recent decades to 100 per cent of gross domestic output.
“The gilt market is nervous about the potential sharp increase,” said Adam Dent, a strategist at Santander CIB. “We are going to have high gilt issuance for many years to come.”
While many investors and strategists including Dent are confident the market will take down the extra supply without a hitch, the stakes remain high. The government’s borrowing costs have climbed, nearing multi-year highs, and memories of former Prime Minister Liz Truss’ misplaced efforts to stimulate the economy remain fresh.
UK bonds have trailed peers in the past month amid concern the government will change fiscal rules designed to constrain how much it can borrow. Last week, Reeves confirmed the plans, which will allow the UK to borrow as much as £70 billion more over the next five years.
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What matters for markets is when these extra sales will take place, and that remains “an area of some uncertainty,” said Moyeen Islam, a strategist at Barclays Bank.
The 10-year yield spread over German notes was broadly steady at around 194 basis points on Monday (Oct 28). It rose to a high of almost 200 basis points last week, the highest level in more than a year.
Estimates for Wednesday’s announcement range from Morgan Stanley’s £286 billion to Nomura’s £315 billion. The surveyed banks see bills offering a net contribution of around £6 billion.
The DMO is expected to broadly maintain the maturity split of its sales programme, according to the median forecast of 14 primary dealers that provided the breakdown. That would maintain a policy of tilting bond sales away from long-dated securities, amid softer demand from the likes of pension funds.
“It isn’t just about the numbers, though,” said Sam Hill, head of market insights at Lloyds Bank. “It is likely that the market’s reaction will be dependent on how coherently the whole macroeconomic strategy is received.” BLOOMBERG