The UK government’s budget last week has attracted cautiously favourable comment, not least for the parallel announcement of a consultation to expand and deepen the treasury bill market.
According to a statement from the UK Debt Management Office (DMO), treasury bills may be issued with a minimum maturity of one day and a maximum 364 days. It is planning a US$1.3 billion increase in net contribution of treasury bills to debt management financing for 2025-26, or around a 10% increase.
Treasury bill yields in the UK typically run at around 4% versus just under 5.2% for 30-year gilts, making them cheaper forms of debt financing.
The DMO’s announcement comes against a broader push to reduce the term of UK government bonds.
A report in October from the Institute for Fiscal Studies (IFS), an independent economics research organisation, points out that the UK’s supply of 30-plus year government bonds was the highest in the G7, at around 11% of total supply, while one to five-year bonds made up 26%. In the US, supply of one to five-year bonds was 60%, with 30-plus year bonds less than 3%.
According to the report, “this gives the DMO the luxury of continuing an overall strategy of reorientation of supply away from the long end of the curve”.
This is a welcome area of flexibility in an otherwise highly constrained fiscal situation. It also bring more risk of exposure towards shorter-term interest rate changes, but that may be a price worth paying, especially in a market with increasingly discriminating and demanding buyers.
“Credibility-enhancing policy choices are the price that the government must be seen to be paying in order to provide reassurance to a wary bond market,” according to the IFS report.
