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Britain faced calls from bond dealers and investors to reduce the issuance of long-dated government bonds, known as gilts, in favor of shorter maturities.
This shift in strategy is aimed at addressing the changing demands of the market as the UK looks to finance an anticipated £300 billion in public borrowing for the next year. The average maturity of the UK’s £2.6 trillion in outstanding government bonds is 14 years, the longest of any major economy and twice the global norm.
The UK Debt Management Office (DMO) is set to announce its bond issuance plans for the financial year 2025/26 on March 26. There is a consensus among investors and dealers that the DMO should accelerate the reduction of the average maturity of its debt, considering the decreased demand for long-dated gilts. The call for shorter maturities is supported by the broader investor appeal of less risky, short-dated gilts, which include banks, hedge funds, and foreign investors who collectively own about 25% of British debt.
The shift towards shorter-dated issuance comes as the demand from company pension funds for long-dated bonds has declined. Regulatory changes in the early 2000s led final-salary pension schemes to invest in long-dated bonds to secure future payouts. However, as these schemes are now largely closed to new members, the demand for long-dated paper has significantly diminished.
While long-dated gilts offer the advantage of locking in interest rates and reducing the amount of debt that needs to be refinanced annually, they also pose a greater risk of losses for investors. The spread between 30-year and 5-year gilt yields stands at about 0.9 percentage points, the widest since 2021, indicating a market preference for shorter maturities. Additionally, short-dated gilt yields are more aligned with the falling Bank of England interest rates and reflect weaker near-term economic conditions.
For the financial year 2025/26, proposals suggest that the DMO should target 10-15% long-dated conventional gilt issuance. This would mark a decrease from the current financial year, where long-dated gilts are expected to account for around 20% of issuance, down from 22% in 2023/24.
The DMO has already reduced the sale of inflation-linked bonds following cost concerns, which halved as a share of new issuance between 2017 and 2024. Despite the high demand at auctions for long-dated gilts, the DMO has acknowledged the higher costs of selling these as demand has waned.
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