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Investing.com -- Barclays has underscored the mounting pressures confronting the UK gilt market in the lead-up to the forthcoming Budget, drawing attention to the fact that yields on 30-year gilts have climbed to levels not seen since 1998.
In the report released Wednesday, Barclays states that 30-year gilt yields have risen sharply from 4.5% a year ago to 5.7% recently, while 10-year gilt yields have climbed from 1.0% to near 4.7% since 2022.
This increase in borrowing costs significantly impacts the UK’s public finances outlook, despite the UK not being a fiscal outlier among advanced economies by traditional debt and deficit metrics.
The investment bank identifies a "step change" in gilt supply that private markets must absorb, with net supply now averaging 4% of GDP. Private sector holdings are projected to rise by 6% of GDP on average over the next four fiscal years, compared to a pre-2019 average of 2.5%, creating "ongoing pressure on yields" and challenging market absorption capacity.
Barclays emphasizes that the government "no longer enjoys ’borrower’s privilege’" and must recalibrate supply to match "a more elastic and less predictable demand base."
The weighted average maturity of primary gilt supply, which exceeded 20 years in 2016-17, is forecast to fall below 10 years in 2025-26 as the UK Debt Management Office focuses on cost-effective issuance.
The report concludes that the upcoming Budget represents "a key moment to announce measures needed to maintain and bolster market confidence," with markets judging the Budget on whether its consolidation measures are "credible and deliverable."
Barclays warns that changing fiscal rules "could generate an adverse market reaction" and potentially "catalyse a gilt crisis."