Fiscal headroom fell to £15 billion from £23.6 billion and debt interest is forecast to be £14 billion higher this year. The revised gilt remit cut long-dated issuance by £7.7 billion, and the 10-year yield slipped to about 5.33%.
The bond market's verdict on Wednesday's UK Budget was calm. One likely reason has less to do with tax and spending than with which bonds the government plans to sell.
Chancellor John Healey's Budget left the government with £15 billion of headroom against its fiscal rules in 2029-30, down from £23.6 billion in March, rising to £22 billion in 2030-31. The Office for Budget Responsibility forecasts debt interest about £14 billion higher this year than before, and £12 billion higher on average over the medium term, "reflecting increased forecasts for gilt yields and Bank Rate." By 2031-32, debt interest reaches £160 billion, or 4.2% of GDP. The Budget also raises all rates of tax on savings income by 2 percentage points.
The remit shift
The revised gilt financing plan shifts supply toward the short end. Short-dated conventional gilt sales rise by £2.7 billion and medium-dated by £7.5 billion, while long-dated conventional sales fall by £7.7 billion, cutting the long end's share of the remit to 6.2% from 9.1%, according to an analysis by Rathbones.
Long gilts are where the pressure has been. The 30-year yield touched 6.04% on Oct. 7, the 10-year yield hit a 19-year high of 5.527% in early October, and the OBR noted that the 10-year has ranged from about 4.5% to 5.5% since March. Selling fewer long bonds reduces the supply investors must absorb at the point on the curve where demand has been weakest.
The response was muted in the way the Treasury would have wanted. The 10-year gilt yield fell about 2 basis points to around 5.33%, gilts outperformed U.S. Treasuries by about 5 basis points, sterling was little changed at about $1.3307 and the FTSE 100 edged higher. "Uneventful," said Bilson of Schroders, "exactly what the bond market wanted." Part of the move came before the speech, and the 10-year gilt sits in the medium-dated range, where planned sales rose.
What shorter funding costs
Shortening the maturity of new debt is not free. Short gilts roll over sooner, which means the government's interest bill responds faster to changes in Bank Rate. The OBR's higher debt interest forecast already reflects higher expected policy rates, so the remit trades one sensitivity for another: less exposure to the long end, more to the Bank of England.
The same lever across the Atlantic
Britain is not alone in managing term premium through maturity choice. Citi expects the U.S. Treasury to cut the size of its 20-year and 30-year bond auctions by $3 billion each at its quarterly refunding on Nov. 4, citing a Treasury dealer survey that asked about future auction sizes and "the relatively weak performance of the first few long-end buyback operations." The U.S. 30-year yield was about 5.32% on Wednesday.
Reading the reaction
The supportive reading is that the market rewarded a credible plan. Supply was moved away from where it hurts most, the fiscal numbers contained no surprise, and the gilt market held steady on a day when Treasuries sold off.
The critical reading is that the fiscal position got weaker. Headroom fell by about a third, interest costs are rising toward £160 billion a year, and moving issuance to shorter maturities increases the government's exposure to future rate decisions. Some of Wednesday's rally also came in the hours before the speech.
What to watch
The Debt Management Office's detailed auction calendar, the 30-year gilt yield relative to its October high above 6%, the Bank of England's next decision, and the U.S. refunding announcement on Nov. 4.