The UK is expected to significantly reduce its government bond issuance over the coming year, providing a rare positive development for bond investors concerned about the country's fiscal pressures. According to a median survey of 12 primary dealers, the UK Debt Management Office (DMO), which issues bonds for the government, is projected to announce total issuance of £245 billion (approximately $331 billion) for the 2026/2027 fiscal year. This would mark the lowest level in three years, representing a decrease of £59 billion, or roughly 20%, compared to the current fiscal year. This reduction may help alleviate some of the recent pressure on UK government borrowing costs, which remain the highest among G7 nations.

BNP Paribas economist Dani Stoilova commented, "I believe this will allow the market to settle into a more comfortable position in the coming months. After the shocks of the pandemic and the energy crisis, this represents a return to normality." The anticipated reduction in gilt sales for the next fiscal year will be confirmed after Chancellor Rachel Reeves delivers the Spring Budget statement on Tuesday. The DMO will then announce its detailed bond issuance plan. While Reeves will present updated economic forecasts, she has previously indicated that no major policy shifts are expected.

The expected decline in gilt issuance reflects a recent improvement in the UK’s fiscal position. Tax revenues have exceeded projections by budget oversight bodies, and government spending on debt interest has been significantly lower than anticipated. Investors will be watching closely how the £245 billion in bond sales for 2026/2027 will be allocated across different maturities and whether this allocation has changed since Reeves’ November budget. Based on dealer forecasts, sales of short-, medium-, and long-term bonds are all expected to decline, with the share of inflation-linked bonds also set to shrink. The proportion of unallocated issuance is projected to be 10.2%, compared to 9.2% in March of last year. By the time of the November budget, this share had been adjusted to 2.7%, reflecting bonds already sold or assigned to specific maturities.

Paul Robson, a strategist at NatWest Markets, and his team noted that retaining an unallocated portion will help the DMO strike a balance between "predictability and flexibility." The overall reduction in gilt sales comes after a year in which the DMO has been shortening the weighted average maturity of its debt to ease pressure on long-term yields, as demand from traditional buyers like pension funds has continued to weaken. This has helped push the 30-year yield—which is particularly sensitive to fiscal risks—to its lowest level since April, just months after it reached a 27-year high.

Despite the improved outlook, market participants remain cautious. UK debt as a percentage of GDP currently stands at around 93%, following a surge during the COVID-19 pandemic. Political risks also remain elevated, as Reeves has faced pressure from within her own party to scale back planned spending cuts. Nevertheless, February proved to be a strong month for UK government bonds. The 10-year yield fell to its lowest level in 2024, driven by slowing inflation, a weaker labor market, and the Bank of England's decision to hold interest rates steady. This has bolstered market expectations for further rate cuts: traders are pricing in an 80% chance of a 25-basis-point cut in March and see an April reduction as nearly certain.

Strategists, however, are cautious about how long this favorable environment can last. Political uncertainty remains high, with potential challenges to Prime Minister Keir Starmer's leadership, and any successor could be perceived as likely to increase spending. Even with the planned reduction, the £245 billion in gilt issuance would still rank as the fourth-highest level in history. With governments worldwide showing little fiscal restraint and borrowing heavily, buyers face intense competition for debt. NatWest expects the 10-year yield to retest its 2025 high of around 4.8%. As Robson noted in a report, "Against a backdrop of global supply creating a buyer’s market, substantial issuance will still need to be absorbed."