Glut of debt threatens market malfunction

TREASURY officials have been warned that waning demand for long-term gilts leaves Britain in danger of repeating the market chaos seen in the wake of the Truss/Kwarteng mini-Budget.

Senior bankers and pension fund managers held meetings with the Debt Management Office (DMO) and Bank of England ahead of the March 6 Budget at which they warned that the UK risked suffering its first failed debt auction in 15 years. City figures fear that supply will outstrip demand within the next 18 months as the Government prepares to issue historic amounts of debt and as seismic changes in the pension industry turn retirement funds from buyers to sellers.

Concerns are focused specifically around demand for long-term debt, which matures over 20 years or longer.

The Government announced plans in the Budget to reduce the amount of longdated debt it will issue this year by more than expected following the meetings. The DMO said it would issue £53bn this year and £49bn in the next financial year, even as the overall number of bonds increases. The changes appear designed to ease market concerns and ensure the Government is selling the right type of debt to satisfy demand.

However, some leading City figures say favouring more short-term debt is unlikely to solve the problem.

“There is a gap between supply and demand and it doesn’t seem the changes in the remit recognise this problem,” said one major pension fund manager. “Given there could be a failed future long auction, could there be a repeat of 2022 if DMO doesn’t get this right?”

The DMO declined to comment.