UK to Unveil Largest Bond Issuance Plan in History: Will the Bond Market Repeat the “Flash Crash”?

The UK is expected to propose one of the largest borrowing plans in history this week, with bond traders anticipating a significant increase in government bond issuance. UK Finance Minister Reeves is walking a tightrope, balancing his government’s pledge to boost growth with calls for fiscal discipline.

The UK Debt Management Office (DMO) is set to announce an increase of 15 billion pounds ($19.5 billion) in UK government bond issuance this fiscal year, according to the median forecast of 16 primary dealers. This will take total borrowing to £293bn, the highest level outside 2020, which was skewed by the response to the pandemic.

The budget will be the first time investors see the new Labor government’s efforts to finance widespread investment. It will also set the stage for massive borrowing expected in the coming years, as governments roll over huge debt that has ballooned to 100% of GDP in recent decades.

Adam Dent, strategist at Santander, noted that “the gilt market is nervous about the potential for significant growth. Gilt issuance will remain high for many years to come.” While many investors and strategists believe the market will absorb the additional supply smoothly, risks remain high.

The British government’s borrowing costs have climbed to near multi-year highs, with memories of former Prime Minister Truss’s misguided efforts to stimulate the economy still fresh. UK bonds have lagged other bonds over the past month on concerns the government will change fiscal rules aimed at limiting how much it can borrow.

Last week, Reeves confirmed the plan, which would allow the UK to borrow up to £70bn over the next five years. Barclays strategist Moeen Islam said what matters to the market is when these additional sales take place, which remains “an area of uncertainty”.

The 10-year German Bund yield spread was essentially stable at around 194 basis points on Monday. The spread rose to a high of nearly 200 basis points last week, the highest level in more than a year.

Forecasts released on Wednesday ranged from Morgan Stanley’s 286 billion pounds to Nomura’s 315 billion pounds. Banks surveyed believed the net contribution from the bills would be around £6bn. DMO is expected to broadly maintain the tenor split of its sales plans, based on the median forecast from 14 primary dealers providing breakdowns.

Sam Hill, head of market insights at Lloyds Bank, said: “It’s not just about the numbers. The market’s reaction is likely to depend on the coherence of the overall macroeconomic strategy.”

Key Takeaways:

• The UK is expected to propose one of the largest borrowing plans in history this week.
• The UK Debt Management Office (DMO) is set to announce an increase of 15 billion pounds in UK government bond issuance this fiscal year.
• The British government’s borrowing costs have climbed to near multi-year highs.
• UK bonds have lagged other bonds over the past month on concerns the government will change fiscal rules aimed at limiting how much it can borrow.

Related Topics:

• UK Economy
• Government Bond Issuance
• Fiscal Discipline
• Market Reaction