UK Spring Statement: Overall, a gilt remit with a good outcome

It was the Spring Statement the Chancellor never wanted to deliver, with the ramifications of last October’s budget looming large over both the economy and the UK bond market. Not surprisingly, the Office of Budget Responsibility (OBR) slashed its growth forecasts for 2025, revising GDP growth from 2% to 1%.

The private sector, which is still adjusting to the tax rises due to come into force in April 2025, and the increase in the cost of hiring workers associated with the rise in the minimum wage and the workers’ rights bill, is still looking soft. Prices too are rising, placing upward pressure on inflation, at the very moment when the Bank of England (BoE) should be cutting rates to support growth. The domestic economy is stagnating at a time when external pressures are building, and America’s trade policy is creating uncertainty globally.

But it was the backdrop for borrowing, and the resultant gilt remit that was most important to bond investors. Given much of the above was already known, and the fact it was a Spring Statement and not a Budget, the market was less nervous about what the Chancellor would say, and more anxious about the sheer scale of the gilt remit. It was imperative that the news was sufficient to allay growing concerns around debt sustainability.

The Chancellor made all the right noises in terms of spending cuts and adhering to the new fiscal rules. Her comment about bringing forward business investment to spur growth and look for spending cuts and efficiencies later in the parliament slightly spooked the gilt market as it feared this might be a precursor to a larger remit, and gilts sold off quite significantly. However, the market was somewhat relieved to see the outcome for 2025-2026 land at £299bn, comfortably below upside estimates of up to £320bn of gilt issuance. Not only was the remit smaller than expected but shorter in maturity than in previous years. This resulted in a sharp rally that saw gilt yields decline across the curve. The offset however was that borrowing was revised higher for each year of the parliament–an extra £43.8bn.

The construction of gilt market ownership and the appetite of domestic buyers has changed. With that in mind, the Debt Management Office targeted the majority of its syndications in the medium dated bucket.

The details in the table below highlight that there will be less long dated gilts and index linked issuance in favour of short and medium dated securities. The combination of long dated and index linked bonds totals 23% of the remit. That is a dramatic reduction from pre-September 2022, when long gilts and index linked bonds were close to 50% of total issuance. This serves to highlight how the construction of gilt market ownership and the appetite of domestic buyers has changed. With that in mind, the Debt Management Office (DMO) also targeted the majority of its syndications in the medium dated bucket. We fully expect that any long dated nominal gilt and index linked syndications will also be issued in the shortest possible maturities within their respective buckets.

This outcome led to a flattening of the yield curve, as long dated yields fell faster than those in the shorter maturities. The worst performing area of the curve was the 10- to 20-year point reflecting the heavy burden it will carry in terms of supply. Index linked bonds did well to keep pace in the rally despite the weaker inflation print in the morning, again highlighting that the market was relieved that index linked issuance had been reduced as real yields are close to recent highs in yield.

Planned Issuance by the Debt Management Office 2025 to 2026

Source: Debt Management Office. Please note chart is for illustrative purposes only.

There were also a few welcome surprises for the market around the unallocated pot–the greater than expected increase in the pot size to 9.2% of the remit, but also the announcement that the unallocated pot could be used to facilitate a new “programmatic gilt tender” operation. This new initiative will permit the DMO to bring a gilt tender to the market with just two days’ notice. It has been clear for some time that the gilt curve has been separated into two distinct curves, a high coupon and low coupon curve. This new program will provide the DMO with the flexibility and optionality to alleviate any liquidity issues and valuation dislocations that may arise and take advantage of pricing anomalies if they feel it makes sense for the taxpayer. The unallocated pot will also be used to react to demand around gilt syndications and will likely find its way into the medium and long buckets.

So, in short, there is no real wiggle room, the cup is running over, and we are already reliant on the kindness of strangers to pick up the slack.

Overall, the remit was a good outcome, with the DMO reacting to the changing demand backdrop for gilts. It also provides the DMO with the flexibility it requires in a volatile economic and political landscape. There remain question marks around the OBR’s projections for both growth and productivity, and should these be revised lower, then future borrowing numbers will be projected higher.  So, in short, there is no real wiggle room, the cup is running over, and we are already reliant on the kindness of strangers to pick up the slack. If the economy continues to perform poorly then overseas buyers may seek a different cup to drink from and the only option left for the Chancellor will be to come back to the market in the Autumn Budget with further spending cuts or tax rises.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.