Bond dealers urge UK to cut sales of long-dated debt

UK Central Bank

Bond dealers have told the UK’s Debt Management Office (DMO) that the UK government should reduce sales of long-dated government debt (bonds) in the financial year starting in March — and sell more short and medium term conventional gilts — due to lower demand from liability driven investors (LDI).

Minutes of an annual DMO meeting with Gilt-edged Market Makers (GEMMs) and gilt investors said: “A number of attendees noted that there had been a significant structural change in gilt demand, in particular noting declining demand from liability driven investors at longer maturities.”

LDI funds are used by UK life insurers and pension funds to meet regulatory requirements to support their long-term liabilities with assets deemed appropriate.

The sector came close to collapse in September 2022 after huge declines in long-dated bond prices following then Prime Minister Liz Truss’ much-criticized budget plans.

“Given the observed change in structural gilt demand, strong support was expressed for a proportionate reduction in long conventional issuance next year relative to 2023-24, with commensurate increases in the proportion of short and medium conventional gilts to be issued,” the minutes of the meeting said.

“Those attendees that offered an opinion also suggested that the proportion of index-linked gilts should be reduced somewhat and that the programme should be directed more towards issuance in the 10- to 20-year maturity area at the expense of longer dated index-linked gilt issuance.

“Further green gilt issuance was supported by many GEMMs with a programme of around £10 billion mentioned.

“Support was also expressed further to build the green gilt yield curve with maturities in the 5- and/or 20-year area mentioned.”

The minutes of the meeting said the UK’s gross financing requirement for 2024-25 is currently projected to be £276.9 billion, as published in the Office for Budget Responsibility’s (OBR’s) Economic and Fiscal Outlook (EFO) on November 22, 2023.