Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK government is shifting to shorter-term borrowing to lower its interest bill as a global debt sell-off adds to the pressure on its tax and spending plans.
Jessica Pulay, head of the UK’s Debt Management Office, said the agency was softening a reliance on long-term borrowing that has made the country an outlier among major global bond markets, amid falling demand from institutional investors.
Shorter-term debt is currently cheaper to take out — an important consideration for a country whose issuance costs have surged this year and whose Labour government is struggling to remain within its tight fiscal rules.
But it is also more exposed to interest rate gyrations and strengthens the hand of bondholders by requiring the government to return more regularly to the markets.
While the average maturity for the UK’s entire debt stock is 14 years, analysts at RBC Capital Markets forecast that the gilts due to be issued between July and September this year will have an average maturity of around nine years, a historic low.
“There has been an important shift in the relative proportions this year” away from long gilts and towards short-dated debt, Pulay told the Financial Times.
She said the move reflected the DMO’s analysis of taxpayer value, given the “declining strength” of demand for longer-dated debt as the pension industry’s appetite for it wanes.
Investor concerns about the scale of chancellor Rachel Reeves’ borrowing plans, as well as those in other big economies, have driven gilt yields higher this year.
Reeves has vowed to fund day-to-day spending entirely with tax revenues by 2029-30, her key fiscal rule. But in last autumn’s Budget she also loosened her pledge to have debt levels falling by the end of the parliament by excluding borrowing for investment from the calculation.
The chancellor’s ability to keep a grip on spending has been put further under question after Prime Minister Sir Keir Starmer’s decision to reverse a cut to pensioner subsidies she unveiled last year.
Last week the 30-year gilt yield climbed to 5.48 per cent, also pushed up by global markets unsettled by worries about Donald Trump’s tax-cutting budget bill.
Amid a rally in government bonds on Tuesday, the 30-year gilt yield fell 0.08 percentage points to 5.4 per cent. The long-term UK borrowing benchmark is up 0.37 percentage points this year and close to its highest level since 1998.
The additional interest rate on such debt compared with two-year gilts has reached close to 1.5 percentage points, part of a growing disparity between long- and short-term borrowing costs that is creating problems for debt managers across the globe. It was below zero just over two years ago.
The rise in yields has also contributed to the Treasury’s difficulties in remaining within its fiscal rules.
The DMO said last month it would increase its debt sales for the 2025/26 financial year by £5bn to £309bn, but would reduce its issuance of long-term gilts by £10bn and put more through short-dated Treasury bills.
That followed sustained lobbying from bankers and investors for the DMO to issue less long-term debt as the additional interest rate on that debt rises.
UK gilts’ average maturity compares with about six years for US Treasuries and is well above most other government bond markets. This reflected huge historic demand for long-term debt from pension funds seeking to match their long-term obligations.
Recommended
But as so-called defined benefit pension funds have closed to new members and their populations have aged, the demand for long-term debt has shrunk. Other participants such as hedge funds typically want shorter-dated debt.
Some analysts have speculated that the DMO could go much further to arrest the rise in borrowing costs, and follow past precedents in the UK and US by suspending long-term debt sales to restrain interest costs.
Pulay said the most important thing for the UK’s funding needs was to have a “smooth and efficient market” in a period of “elevated” issuance, including making sure there was enough liquidity in long-term debt for investors that want it.
“One of those factors means having a well-functioning curve at all the key benchmark maturity points, in order to meet the demands of the investor base,” she said. “We are very aware that investors have different so-called preferred habitats, and we want to ensure that we have a well diversified programme of issuance to meet the needs of all our investors.”
