UK Under Pressure to Shorten its Debt

The UK government is facing growing pressure from bond investors and dealers to issue fewer long-dated government bonds, Reuters reports. With approximately £300 billion in public borrowing planned for next year, investors are increasingly wary of the UK's hefty debt burden, characterized by its exceptionally long average maturity.

The UK's £2.6 trillion of outstanding government bonds, the fourth-largest sovereign market globally, boasts an average maturity of 14 years – double the international norm and the longest among major economies. While this figure has decreased from a peak of 16 years in 2019, investors and dealers argue for a swifter reduction.

"It feels like it's becoming a lot more pressing," Mitul Patel, senior portfolio manager at State Street, told Reuters. Patel warned that failing to curb long-dated gilt issuance could exacerbate market fragility in the event of another sell-off, similar to the one experienced at the start of 2025. "If you oversupply the market with longs, that could have a much bigger impact, in that you'd see much more disorderly selloffs as a result of that in this current environment," he added.

The pressure stems from several factors, including a global bond selloff that pushed British 30-year gilt yields to their highest point since 1998, as well as the UK government's plans to increase borrowing for public spending and investment.

A key driver of the shift is a waning demand for long-dated bonds from company pension funds. Regulatory changes in the early 2000s mandated final-salary pension schemes to purchase long-term bonds for future payouts. However, with most of these schemes now closed to new employees, demand for long-dated gilts is dwindling.

"There simply isn't the demand for longer-dated paper on a demographic basis compared to 20 years ago," explained Moyeen Islam, fixed income strategist at Barclays, a primary dealer in gilts.

While long-dated gilts offer advantages for the UK, such as locking in low interest rates for extended periods and reducing refinancing needs, short-dated bonds appeal to a broader investor base, including banks, hedge funds, and international investors who own a significant portion of UK debt.

"We're definitely seeing a shift shorter from our client base," said Megum Muhic, strategist at RBC, to Reuters.

The spread between 30-year and 5-year gilt yields is currently at its widest since 2021, highlighting the premium the UK is paying for its long-term debt.

Beyond the pension fund shift, other factors bolster the argument for shorter-term issuance. Short-dated gilt yields more closely track Bank of England interest rates, which are currently falling. Moreover, the Bank of England's unwinding of its quantitative easing program is creating demand for cash-like short-dated gilts.

This financial year, conventional gilts with a maturity exceeding 15 years are on track to represent only 20% of new issuance, down from 22% in 2023/24 and nearly 30% in prior years. Analysts predict a further decline to 10-15% in 2025/26.

While the UK Debt Management Office (DMO) has acknowledged the higher costs associated with long-dated gilts and has reduced issuance of inflation-linked bonds, demand for long-dated gilts at auctions remains robust.

Despite this, experts believe that a significant shift towards shorter-term bonds is necessary to alleviate the mounting pressure on the UK's debt profile.