UK's Strategic Bond Market Revamp: Slashing Long Bonds, Increasing Short-Term Issuances

TradingKey - To cut interest costs, the UK is pivoting towards short-term borrowing. 

According to the Financial Times, Jessica Pulay, head of the UK Debt Management Office (DMO), stated that due to declining demand from investors for long-term government bonds, the agency is gradually reducing its reliance on long-term bonds in favor of lower-cost short-term bonds.

Last month, the DMO announced an increase in the debt issuance target for the fiscal year 2025/26 by £5 billion, bringing it to £309 billion. However, issuance of long-term gilts would be reduced by £10 billion, while short-term Treasury bills would see an increase.

The average maturity of the UK's debt stock is currently 14 years, but analysts at RBC Capital Markets predict that the average term of UK government bonds issued between July and September this year will fall to around 9 years, marking a historic low.

The cooling interest in long-term bonds is related to shifts in the pension industry. Pension funds, which once favored long-term government bonds, are now grappling with a declining number of subscribers. Data indicates that UK pension funds' demand for government bonds with maturities longer than 30 years has shrunk by nearly 40% compared to a decade ago.

Moreover, the market is currently more inclined towards short-term trades. The yield on UK 30-year government bonds reached 5.48% last week, having risen by 0.37 percentage points this year, and is nearing its highest level since 1998. In contrast, the yield on UK two-year government bonds stands at about 3.98%, 150 basis points lower than the 30-year counterpart.

Shifting to short-term bonds is not without its risks, as they are more susceptible to interest rate fluctuations and require the government to access the market more frequently. With uncertainty surrounding Federal Reserve rate cuts and Trump's tariff wars disrupting global markets, RBC Capital Markets suggests this move could be likened to increasing sailing frequency during a storm.