UK set to add to heavy gilt sales in coming financial year- Reuters poll

By Andy Bruce and Suban Abdulla

(Reuters) – Britain will ramp up its sales of government bonds in the coming financial year, reflecting the need to roll over maturing gilts but also underscoring the constraints faced by finance minister Jeremy Hunt who is due to announce his budget on Wednesday, dealers taking part in a Reuters poll said.

Hunt will try to use his pre-election tax and spending statement to boost Prime Minister Rishi Sunak’s flagging fortunes by cutting taxes.

But he must avoid adding to bond investors’ worries about the public finances with the price of British government borrowing already falling by more than that of peers and huge amounts of debt scheduled to hit the market.

The poll showed that the median forecast among banks that can bid directly at government bond auctions – known as primary dealers – was for gilt issuance of 258.4 billion pounds ($328.06 billion) in the 2024/25 financial year, up from the 237.3 billion pounds 2023/24 remit.

If the Debt Management Office (DMO) sells that many gilts in 2024/25, it would be the second-heaviest year for issuance on record after the 2020/21 financial year when Britain was hit by the coronavirus pandemic.

The predicted increase largely reflects how the volume of maturing gilts that need to be replaced is due to increase to 140 billion in 2024/25 from 117 billion in 2023/24, rather than any expectation that Hunt will announce major giveaways to voters or businesses on Wednesday.

“The takeaway for markets is that we are still in a period of sustained, substantially high gilt issuance,” said Imogen Bachra, NatWest’s head of UK rates strategy.

Heavy issuance plans would weigh on British gilts more so than for bonds sold by other governments, Bachra said, citing the Bank of England’s separate bond sales and weakening demand from pension funds for long-dated debt.

The BoE plans to unburden itself of 100 billion pounds of gilts between October 2023 and September 2024 through a combination of active sales and allowing old bonds to mature, as it presses on with its quantitative tightening (QT) programme.

Nomura economists said the gilt market will have swallowed more bonds in 2023/24 and 2024/25 – after taking into account the BoE’s quantitative easing and tightening policies – than during the previous nine years combined.

“The question is: what price will investors demand in order to hold gilts?,” they said in a note to clients.

UK 10-year gilt yields are up around 53 basis points (bps) this year. U.S. and German yields have risen roughly 33 bps each.

The poll showed the DMO will again skew issuance towards short-dated bonds, which for a third year running are expected to account for more than a third of all gilts issued in 2024/25.

Britain is also likely to raise extra funds by increasing T-bill issuance by 10 billion pounds with a further 7.5 billion pounds coming from National Savings and Investment (NS&I), the government’s consumer savings arm.

Taking expected gilt sales, T-bill and NS&I funding together, the outlook in the Reuters poll for the government’s gross financing requirement in 2024/25 is close to the DMO’s own expectation published in November of 277 billion pounds.

The gross financing requirement is an estimate of the funds the government needs to raise to plug its budget deficit and roll-over bonds that are due to mature.

2024/25 GROSS GILT Of which: NET T-BILL NS&I

ISSUANCE ISSUANCE

(bln stg) Short Med Long IL Unalloc (bln stg) (bln

(%) (%) (%) (%) (%) stg)

MEDIAN 258.4 37 30 19 10 5 10 7.5

AVERAGE 257.6 36.8 30.1 18.9 10.3 5.3 10.3 9.4

MAX 271.7 38 33 21 11.5 7 29.9 22.5

MIN 225.5 35 28 16 9 3.9 4.4 6

COUNT 13 12 12 12 12 10 13 11