Jeremy Hunt will borrow record sums from investors next year, according to figures released alongside the UK chancellor’s Budget on Wednesday — but markets took the prospect of hefty gilt issuance in their stride.
The UK Debt Management Office said it planned to sell £241bn of gilts in the 2023-24 financial year, up from £169bn in the current year and more than the £232.5bn expected by investors ahead of the announcement. The only time the government has borrowed more was during the Covid-19 pandemic in 2020-21, a period when the Bank of England bought the majority of new issuance under its quantitative easing programme.
The lack of reaction from markets, which focused more on a steep sell-off in European bank shares, was in stark contrast to the meltdown that followed former chancellor Kwasi Kwarteng’s September “mini” Budget of unfunded tax cuts. Investors said the hefty bond issuance plans had been broadly expected, unlike Kwarteng’s borrowing plans that took markets by surprise.
“The gilt market was expecting some pretty huge supply numbers and that’s what we got” said James Athey, a bond portfolio manager at Abrdn.
The 10-year gilt yield had fallen 0.14 percentage points to 3.34 per cent before Hunt addressed the House of Commons on Wednesday, reflecting a rise in price, but had barely budged by the time he took his seat, suggesting the chancellor’s borrowing and spending plans had received market approval.
Hunt’s fiscal plans, unlike those of his predecessor last year, were accompanied by a new set of forecasts from the Office for Budget Responsibility, the independent fiscal watchdog.
Investors said they had been reassured by the involvement of the OBR, as well as Hunt’s plans — first outlined in October’s Autumn Statement — to restore UK public finances to a sustainable footing in the coming years.
“There is a clearer and more sustainable medium-term path, even amidst the chaos of this week, and that helps restore credibility and potentially pushes long-term investors back into gilts,” said Michael Metcalfe, global head of macro at State Street. “It shows the importance of being credible and sort of doing and saying what investors want to hear.”
Hunt has also been helped by a backdrop of falling bond yields globally, as the fallout from the collapse of California-based Silicon Valley Bank, and troubles at Swiss lender Credit Suisse bolsters demand for government debt.
“Demand for safe haven assets is high due to systemic risk concerns within the banking system,” said Craig Inches, head of rates and cash at Royal London Asset Management.
However, if stresses in the banking system subside and investor focus returns to high inflation and the prospect of further rises in Bank of England interest rates “it could be a challenging environment to issue such a large amount [of gilts]”, Inches added.
