The first ever UK government bonds, known as gilts, were issued in 1694, but this fiscal year will mark the largest ever net issuance of gilts, at a time when the Bank of England are net sellers of the assets.
Data from Collidr indicates that around £238bn worth of gilts will be issued this year – a 29 per cent increase on last year.
The UK Debt Management Office recently announced plans to issue £271bn of gilts during the 2024-25 fiscal year – £35bn higher than the current year.
This has led to speculation about how the increased supply of government bonds may affect gilt yields going forward.
Economic theory suggests that increasing the supply of bonds while holding demand constant should put downward pressure on prices and drive yields higher.
In normal circumstances, a sharp increase in the supply of anything would be expected to lead to a fall in price.
A fall in the price of a gilt means the yield is rising.
Josh Davis, investment manager at Dowgate Wealth, says the impact of the increased supply is likely to be most acutely felt in bonds with a longer date to maturity, where he expects prices to fall meaningfully.
The reason the bonds with a longer date to maturity would be expected to suffer any price falls is that those gilts that come to market now would reflect the higher interest rates of today, while bonds already issued lock in the old interest rate.
A bond with a longer date to maturity therefore has locked in the older, lower interest rate for longer, and therefore may be less attractive in a world where newer bonds are being issued at a higher interest rate.
But Robert Alster, chief investment officer at Close Brothers Asset Management, highlights the reason government bonds, including gilts, may find them an attractive asset class right now as the economic outlook deteriorates.
He explains this is because gilts, particularly those with a long date to maturity, tend to rise in value when the economic mood darkens, as investors anticipate a recession would lead to interest rates being cut, which would lead to lower yields on bonds issued in the future, and so increases the attractiveness of the yields offered by existing bonds.
Supply and demand
But the other factor of importance, according to Phil Milburn, fixed income fund manager at Liontrust, is that the gilt issuance this time is happening in the teeth of the Bank of England being a net seller of gilts, following a period after the global financial crisis when they were net buyers, via quantitative easing.
Milburn says: “This year will see the largest issuance of gilts as a percentage of GDP outside of wartime. And those are not ideal conditions for investing in such a market. The fact the BoE is selling doesn’t help either, and it comes at a cost to the taxpayer.”
