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UK government debt sales are expected to drop for the first time in four years, in a sign that chancellor Rachel Reeves’ effort to keep a lid on borrowing is easing pressure on the gilt market.
Big investment banks expect £247bn of gilt sales for the year to March 2027, according to the average of seven estimates, down from the £304bn the UK is raising in the current fiscal year.
The drop in issuance expected alongside next week’s spring forecast for the public finances — which would be the first since the 2023 fiscal year — is partly due to a lower bill for refinancing maturing debt in 2026-27. But it has also been bolstered by a reduction in the government’s borrowing needs after a broad rise in taxation.
Though gilt sales remain high by historical standards, investors have grown more optimistic on the supply-demand outlook for gilts at a time when other big economies such as Germany and Japan are expanding their issuance.
“The UK has learnt, through bitter experience, that deficit-fuelled growth won’t be tolerated by markets,” said Mike Riddell, fund manager at Fidelity International. “Other countries haven’t been forced to change tack yet.”
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Officials will hope the turning of the tide in the government debt supply will help keep a lid on borrowing costs which surged to a 16-year high last year above 4.9 per cent. They have since come down to just above 4.3 per cent as Reeves’ tax-raising November Budget bolstered a rally in gilts.
After initially spooking the market through its spending plans, the Labour government doubled its wriggle room against its borrowing limits at the Budget to £22bn. The picture was further improved by the record £30bn surplus the government enjoyed in January.
Government borrowing was £112.1bn between April and January, £14.6bn below the same period in the previous fiscal year. The figure was also below the Office for Budget Responsibility’s forecast of £120.4bn for the period.
One senior rates trader said the January public finances figures had been a “big boost” for the government: “It gives them just a lot more breathing room to do what they need to do.”
One gauge of market concerns over an oversupply of the debt, the gap between gilt prices and those on interest rate swaps of the same duration, has eased to levels last seen before the Labour government’s first Budget in October 2024.
Ten-year gilt yields are 0.14 percentage points higher than the equivalent swap rates, from the more than 0.3 percentage points investors were demanding during gilt sell-offs last year. The UK has also pared back the share of long-term debt that it issues, which has helped keep a lid on longer-term borrowing costs.
Lower gilt yields are likely to give a modest boost to the headroom Reeves has against her key fiscal rule, which requires her to eliminate borrowing excluding investment by the end of the parliament.
Ruth Gregory, a UK economist at Capital Economics, said lower gilt yields should add £1.5bn to Reeves’ headroom in the forecast beyond that at the November Budget.
However Rob Wood of Pantheon Macroeconomics warned that political instability will remain a factor dogging the gilt markets in the coming months, given the risk that Prime Minister Sir Keir Starmer’s Labour Party suffers from poor performances in this week’s Gorton and Denton by-election race as well as local elections in May.
“I think the market underestimates the pressure on the government to spend more,” said Wood. “The government is highly unpopular and is unlikely to [use] any improvement in the public finances to lower debt or put debt on a lower trajectory than otherwise.”
