Gilt investors unfazed by UK’s borrowing binge

The UK government announced its biggest annual borrowing plan in eight years on Wednesday, as Prime Minister Boris Johnson’s government turns to bond markets to fund its spending spree.

But investors were unfazed by the prospect of a deluge of new gilts, with many having expected an even bigger rise in issuance with borrowing costs close to historic lows.

Chancellor Rishi Sunak announced a £30bn stimulus package in his first Budget to counter the fallout of the coronavirus outbreak, marking the end of a decade of austerity policies with significant increases in capital and day-to-day spending.

To finance the largesse, the UK’s debt management office announced after the chancellor’s speech gilt sales of £156.1bn in the 2020-21 fiscal year, the highest total since 2012-13. Analysts’ average forecast was £166bn.

“Everyone is scratching their heads over why it’s such a low number,” said Theo Chapsalis, head of UK rates strategy at NatWest Markets. “Sunak spent an hour telling us about all these giveaways and we are puzzled that we don’t see it in the issuance figures.”

Gilt yields had risen ahead of the Budget — reflecting lower prices — as investors prepared for a bigger jump in borrowing. But they fell back on the issuance announcement, with the 10-year bond yield trading slightly lower at 0.26 per cent. The UK’s main benchmark borrowing cost remains not far above Monday’s all-time low of 0.07 per cent, reached during Monday’s record-breaking global bond rally.

Markets took the jump in issuance in their stride because the economic impact of the coronavirus is likely to keep fuelling appetite for safe assets, according to Mike Riddell, head of UK fixed income at Allianz Global Investors.

“The UK economy is currently facing the highest level of short-term uncertainty in 10 years,” he said. After an emergency interest-rate cut to a record low of 0.25 per cent earlier on Wednesday, Mr Riddell thinks there is a good chance the Bank of England will resume its bond-buying stimulus programme later in the year.

The government may end up borrowing more than planned next year, according to some analysts. Its forecast is based on growth projections which predate the latest evidence of the spread of the virus.

“I think it’s inevitable the borrowing number will rise during the year, once we see the economic impact of coronavirus coming through and continued need for [a] fiscal response,” said Mr Chapsalis.

Rating agency Moody’s warned about the “deterioration” of the UK’s public finances following the Budget. Mr Sunak’s spending pledges would support economic growth but highlighted the “ongoing difficulty in meaningfully reducing the UK’s gross general government debt burden from its current high levels”, said Sarah Carlson, a Moody’s senior vice-president.