Bond markets are bracing for UK borrowing to rise to £300bn this year

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Global investment banks expect British debt sales this year to rise by nearly 300 billion pounds, the second highest on record, as the government heads off in a confrontation with bond investors over Budget this week.

sow is on track for its worst month since April as unease over a proposed loosening of the country’s borrowing rules helped fuel the recent sell-off. Benchmark 10-year gilt yields rose to 4.29% on Monday, their highest since early July.

Analysts at major investment banks expect the Treasury to increase its so-called net financing requirement in the year to March 2025 to £298bn, from the current figure of £278bn , according to the average of seven investment banking forecasts collected by the Financial Times.

That figure would be the highest ever except for extraordinary borrowing in 2020 to fund Covid emergency schemes, when the Bank of England was a large buyer of debt.

The Budget is the biggest event so far for the UK’s new Labor government, which has said it needs to close a £40 billion gap in the country’s public finances and invest in infrastructure and services. public service.

The government is also planning to increase borrowing to meet its target at a time when taxes are heading towards their highest share of GDP in decades.

As well as loan requests being closely watched for the current financial year, investors will also update their estimates of gilt issuance in coming years, following the announcement by chancellor Rachel Reeves confirm last week that the government would change debt rules to allow more investment.

According to people briefed on the Budget discussions, the government is set to move to a broader measure of net debt – net public sector debt – which would allow it to borrow tens of billions of pounds more. UK in the coming years without violating long-term commitments. term goals.

Rob Burrows, government bond fund manager at M&G Investments, said the government must now give investors confidence that “safeguards are in place to ensure that money is not wasted”.

Bond investors will also be looking for any sign of how much of the extra £50bn a year generated by changes in financial regulation will ultimately be used.

“The market sees this as a really important Budget because it represents a break with the past,” said Moyeen Islam, fixed income strategist at Barclays. reset the UK’s financial credentials” after former Chancellor Liz Truss’s disastrous Mini Budget in 2022.

In the medium term, “the amount of gilt issuance remains really challenging”, Islam added, with issuance in excess of £250bn – £270bn “becoming the norm”.

Analysts at Citi warned in a note last week that “risks to gilts are far from over,” even as the “bad news” for bondholders that new financial regulations imply means “no more”.

But there is still the possibility of a relief hike on Budget Day if investors think the borrowing plan is prudent enough.

Peder Beck-Friis, an economist at bond fund group Pimco, said he expected the “long risk premium” for gilts to decline over time as investors shift their focus from looser financial regulations to “reducing deficits, easing inflation and softening labor market conditions.” .