HomeMost PopularUK Faces Uphill Battle with Heavy Gilt Sales Forecast

UK Faces Uphill Battle with Heavy Gilt Sales Forecast

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By Andy Bruce and Suban Abdulla

Britain’s Financial Outlook

March 5 (Reuters) – The British government is poised to intensify its sale of gilts in the upcoming financial year, signaling the imperative to manage maturing obligations. This move adds pressure on finance minister Jeremy Hunt, whose fiscal strategy will be unveiled in the forthcoming budget announcement, according to a Reuters poll among primary dealers.

Simultaneously, the challenge rests on Hunt’s shoulders to boost Prime Minister Rishi Sunak’s political standing by potentially reducing taxes without exacerbating concerns among bond investors already wary of the ballooning public debt and declining British gilt value relative to other nations.

Mounting Gilt Issuance

The consensus from primary dealers reveals a projected gilt issuance of Β£258.4 billion ($328.06 billion) for the 2024/25 financial year, an increase from the previous year’s Β£237.3 billion figure. Should this forecast materialize, it would mark the second-heaviest gilt issuance year on record, trailing only the peak of the 2020/21 pandemic-fueled financial crisis.

Notably, the hike in issuance primarily stems from the surge in maturing gilts necessitating replacement, rather than expectations of lavish spending announcements by Hunt.

Market Impact

Commenting on the situation, Imogen Bachra, NatWest’s head of UK rates strategy, highlighted the sustained high gilt issuance environment. The overabundance of gilts could exert more pressure on British bonds compared to peer nations, a concern exacerbated by the Bank of England’s parallel bond sales and diminishing demand for long-term debt from pension funds.

Furthermore, with the Bank of England’s agenda to offload Β£100 billion in gilts between October 2023 and September 2024 through quantitative tightening measures, analysts at Nomura project unprecedented gilt absorption levels in the UK market.

Future Financial Operations

The looming scenario requires a strategic focus on short-term bond offerings, with short-dated bonds expected to represent over a third of total gilts issued in 2024/25 for the third consecutive year.

Additional funding avenues may include a Β£10 billion increase in T-bill issuance and Β£7.5 billion from National Savings and Investment (NS&I), aligning with the government’s gross financing requirement projection of Β£277 billion for the upcoming financial year as per the Reuters poll.

Questioning Investor Sentiments

Amid these pronounced actions, investors are left pondering the future dynamics of gilt pricing and demand. The unrelenting increase in UK 10-year gilt yields compared to U.S. and German counterparts underscores the evolving landscape of bond market sentiments.

As the UK navigates through this period of heightened gilt sales, the government, investors, and financial institutions alike are poised for a complex financial journey in the upcoming fiscal year.

($1 = 0.7876 pounds)

Reporting by Andy Bruce and Suban Abdulla; Editing by William Schomberg and Ros Russell

([email protected]; +442075134461; Reuters Messaging: @brucereuters)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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