UK shifts to short-term debt to curb soaring interest costs

The UK government is turning to short-term borrowing to ease rising interest costs as weak investor demand and global market turmoil strain its budget.

This marks a shift from its usual reliance on long-term debt, as surging interest rates worldwide make future borrowing more expensive.

UK changes its debt plan as fewer investors want long-term bonds

The UK Debt Management Office (DMO) is reducing the number of long-term government bonds (gilts) and focusing more on short-term Treasury bills to manage its growing interest payments without breaking its tight budget laws.

DMO lead Jessica Pulay said that this change will balance different kinds of debt to give better value to taxpayers while reacting to changing market conditions where fewer big investors want to buy long-term debt.

Long-term gilts have offered steady and predictable returns that helped pension funds meet future payments to retirees. However, the demand is now falling because many of these pension funds have closed to new members and are slowly shrinking as their members grow older and retire.

Hedge funds and other investors who prefer funds with more discretion over their investments are also looking for such short-term bonds. These can be easier to buy and sell than those locked into funds and offering longer maturities. Investors have so little interest that the government can’t find buyers for long-term debt.

Analysts from RBC Capital Markets say that the new gilts the UK government plans to issue between July and September 2025 will have the shortest average maturity ever seen for newly issued UK debt, with an average term of only 9 years.

This shows that the government now relies more on short-term borrowing to deal with rising costs.

The UK’s overall debt stock still has a long average maturity of about 14 years, much higher than in places like the United States, where the average is only about 6 years. This new trend shows how much pressure the government is under to change its borrowing habits.

The DMO also announced that it would raise its total debt issuance for 2025/26 to £309 billion, £5 billion more than planned. The rise reflects the government’s need for extra funds to cover its spending while trying to stick to its fiscal targets.

The DMO will also reduce long-term gilts by £10 billion and sell more short-dated Treasury bills because they are cheaper to issue and attractive to investors in the current market environment.

High interest rates and budget rules push the Treasury to act

Global investors worry about how much governments in big economies borrow and spend. As a result, they have pushed the cost of long-term borrowing to its highest levels in many years. 

These concerns and pressure have raised the UK’s 30-year gilt yield to 5.48%, close to the highest since 1998. 

Part of this increase came from nervous reactions in financial markets after Donald Trump introduced a plan for a large tax-cutting budget in the United States.

The gilt difference between UK payments on long-term bonds of 30 years and short-term bonds of 2 years is now close to 1.5 percentage points from below zero just two years ago. 

The Treasury must now turn to short-term borrowing to protect the country’s finances from growing interest payments.

Chancellor Rachel Reeves of the Labour government promised that the government would pay for all day-to-day expenses using tax revenue by the years 2029 to 2030. She also relaxed a different rule that required the overall debt to start falling by the end of the current parliament. 

Reeves now says the government will exclude investment borrowing from this rule to give the Treasury a little more room to spend.

Prime Minister Keir Starmer’s decision to reverse a cut to pensioner subsidies introduced earlier adds more pressure to the budget. It makes it difficult for the chancellor to keep spending under control.

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