This year, demand for UK debt dropped to its lowest point following Rachel Reeves’s Budget, which fueled expectations of rising bond yields.
The UK Debt Management Office reported that the latest sale of 10-year UK gilts was oversubscribed by 2.81 times, a decline from 3.25 times in October, amid recent increases in UK bond yields.
The yield on 10-year gilts climbed from 4.21% before the Budget to 4.49% today as investors expressed concerns over the Chancellor’s £32bn-a-year borrowing increase, which could drive inflation and prompt the Bank of England to maintain higher interest rates.
OBR Chief: “We Expected the Budget to Surprise Bond Markets”
The head of the UK financial watchdog, Richard Hughes, told MPs he wasn’t surprised by the market’s reaction to Rachel Reeves’s Budget, which outlined plans for increased borrowing.
Hughes, chairman of the Office for Budget Responsibility (OBR), explained that the surge in bond yields following the Chancellor’s speech was a response to the high levels of new debt Reeves projected for the market. The yield on 10-year gilts rose from 4.21% before the Budget to 4.49% today, after the announcement of a £32bn-a-year increase in borrowing.
Speaking to the Treasury Select Committee, Hughes remarked, “We expected the Budget to surprise the markets due to the sheer volume of gilt issuance. The market reaction largely reflects these higher volumes. More gilts on the market drive down their price.”
He added, “The front-loading of expenditure also caught markets off guard, as the demand for gilt absorption this year and next was greater than anticipated. We anticipated some surprise in the gilt market, which is why we factored in an additional quarter percentage point.”
Hughes concluded, “The current level of gilt yields is broadly in line with our expectations, perhaps slightly higher, but not significantly so.”
