Market News

(Bloomberg) -- The UK’s Debt Management Office is expected to announce its largest bond sales package since the coronavirus pandemic on Wednesday, sweetening the offer with the smallest proportion of long-maturity securities in its history.

The nation is forecast to increase its annual gilt issuance target by £5 billion to £302 billion for the 2025-2026 fiscal year, according to the median estimate of 17 primary dealers polled by Bloomberg.

To make the debt package more palatable for markets, the DMO is expected to reduce the share of long-maturity gilts by more than a percentage point to 17.2%, which would be the smallest in Spring Budget announcements going back to the DMO’s inception in 1998.

The DMO has been gradually skewing its bond sales away from longer maturities to meet repeated calls from both investors and dealers. That’s because demand from pension funds and insurers looking for assets to match against their long-term liabilities has been waning, a significant shift after decades of near-insatiable buying.

“We believe that market attention will be more focused on the split across buckets, rather than the overall supply,” said Morgan Stanley strategist Fabio Bassanin. “We expect a notable reduction in long gilt issuance, continuing the recent trend, but potentially exceeding consensus estimates this time around.”

The weighted average maturity of the UK’s outstanding debt is still much longer than that of its peers. A Bloomberg gilt index has an average maturity of about 13 years, compared to eight years for US Treasuries and German bonds.

The borrowing plan for the fiscal year starting next month will be released after Chancellor of the Exchequer Rachel Reeves unveils her Spring Statement on Wednesday. Having lost the slender £9.9 billion margin she had in October against her main fiscal rule due to rising borrowing costs and weaker economic growth, she is expected to announce cuts to public spending and welfare.

The DMO, led by Chief Executive Jessica Pulay, is responsible for funding the government’s fiscal plans in a way that minimizes financing costs over the long term. That task has been made more challenging amid a global surge higher in bond yields since the pandemic as well as increasing financing requirements.

The supply is also more daunting because the Bank of England is no longer supporting the market with bond purchases and is instead winding down its portfolio.

UK bond yields surged after Reeves’s last fiscal statement in October, as investors were unnerved by her plans to fund investment and stimulate the economy. Since then, she has been actively courting market participants.

“Simply put, the Treasury would prefer to see a gilt remit that is treated as ‘boring’ and simply digested as containing little ‘new’ news rather than being the epicentre of the post Budget narrative as was then case in October,” said Moyeen Islam, a rates strategist at Barclays Plc.

Maturity Split

Banks surveyed by Bloomberg displayed a relatively narrow range of responses for the gross DMO remit, with BMO forecasting around £292 billion and Lloyds seeing £315 billion.

After Bloomberg’s poll closed Friday, Citigroup Inc. strategist Jamie Searle revised his forecast higher to £321 billion, citing public borrowing data which overshot forecasts. Most other researchers believe the latest fiscal numbers won’t be incorporated in Wednesday’s announcement, but only in a remit revision due next month.

Much of the divide in forecasts was over how aggressively the UK would shift toward shorter maturities. Barclays’ Islam called for the UK to “radically” shorten the sales program, while Bank of America Corp.’s Mark Capleton even floated buybacks of long-dated gilts, replacing them with shorter maturities.

For RBC Europe, reducing the average maturity further is difficult, given that there’s still demand for longer-dated maturities. “We think this process is coming to an end,” said RBC rates strategist Megum Muhic.

DMO’s Pulay told Bloomberg in an interview last month that she sees a “sweet spot” for bond offerings that sit between definitions of short and long maturities. She pointed to 10-year bonds as having wide appeal with investors.

According to the Bloomberg survey, the DMO will propose sales of:

• Short-maturity bonds of around £108 billion, or 36% of issuance, around the same as last year’s Spring Budget

• Medium-maturity bonds of around £97 billion, or 32% of issuance, compared to 31% last year

• Long-maturity bonds of around £52 billion, or 17%, compared to around 18% last year

• Inflation-linked bonds of around £31 billion, or 10%, compared to around 11% last year

• The unallocated portion of sales, which gives the DMO some flexibility to adjust the tilt of its sales program throughout the year, will increase to around £15 billion, or 5%; that’s compared to around 4% last year

• A £7 billion net contribution from bill issuance and £9 billion from National Savings & Investment, the UK’s state-owned savings bank

--With assistance from James Hirai.

(Updates with Citi’s revised forecast in 13th paragraph, published after the survey closed.)