UK Plans to Increase Short-Dated Debt Issuance, Potentially Lowering Gilt Yields; Investors Also Closely Watching Whether the Autumn Budget Can Maintain Fiscal Discipline

UK government bond dealers point out that the UK is about to increase its use of short-term debt. This shift could push down UK gilt yields and ease the country's increasingly strained public finances. At the same time, although the upcoming Autumn Budget has set a "do no harm" tone, the market reaction it could trigger still warrants vigilance for the UK gilt market. **UK Plans to Increase Short-Dated Treasury Bill Issuance, Potentially Lowering Gilt Yields** The UK government is expected to update investors on plans to expand the Treasury bill market on October 28. In May this year, the UK government announced it would launch 12-month Treasury bills before the end of the current fiscal year to supplement the existing 1-month, 3-month and 6-month maturities. The UK government has traditionally relied mainly on long-term bonds for financing. The UK is an outlier in terms of debt maturity. In 2025, about 20% of UK borrowing was issued in the form of Treasury bills, compared with an average of about 47% among Organisation for Economic Co-operation and Development (OECD) member countries. Expanding the size of the Treasury bill market will allow the UK to tap growing market demand for short-dated debt while potentially reducing interest costs. For the UK government, any savings would be welcome. Rising borrowing costs have eroded the country's already limited fiscal headroom. **Demand for UK short-term debt has remained strong, with Treasury bill auction bid-to-cover ratios typically exceeding 2x** In the UK, market signs show investor demand for Treasury bills is very strong. Bank of America said demand at the UK's weekly Treasury bill auctions has been strong, and the scale of Treasury bills held by banks has also increased in recent years. Assets under management at UK money market funds have grown rapidly. Such funds typically invest in short-term debt instruments issued by governments, banks and corporations. According to the median of 10 forecasts from a media survey of primary dealers, net UK Treasury bill issuance will reach GBP11 billion (about USD14.7 billion) this fiscal year. That is roughly flat with the previous fiscal year but far above the GBP5 billion forecast by the UK Debt Management Office in April. Dealers also expect issuance to increase substantially next year, with RBC Capital Markets forecasting GBP25 billion. Mark Capleton, rates strategist at Bank of America, said: "Shortening the weighted average maturity of newly issued debt could lower UK gilt yields or reduce upward pressure on them. By issuing shorter-dated debt, the average interest cost can be reduced. In addition, by reducing issuance of instruments such as 10-year gilts, the financing rates on those bonds can also be lowered." He added: "Shortening debt maturity is a trend we are watching globally, but no country needs to do it more than the UK." The shift toward short-term debt has already shown some results. Since the Bank of England said on September 17 that it would stop selling long-dated UK government bonds, the 30-year gilt yield has fallen 11 basis points. By comparison, the French 30-year government bond yield has risen 39 basis points, while the US 30-year Treasury yield has fallen 5 basis points. However, shortening borrowing maturities also carries risksdebt needs to be refinanced more frequently, leaving the government more exposed when interest rates rise. This year, against the backdrop of a global bond selloff, UK borrowing costs have climbed sharply, with the benchmark 10-year gilt yield rising to 5.36%, the highest level since 2007. **Vigilance Needed on Potential Shock from the Autumn Budget** It is worth noting that the UK Burnham government will also unveil the Autumn Budget on October 28. After the previous chancellor cumulatively raised taxes by more than GBP60 billion (about USD80 billion) across two budgets, current Chancellor John Healey has no intention of launching another large-scale, headline-grabbing fiscal package. Several phrases Healey and his Treasury officials have repeatedly used recently"do no harm," "stay the current course," and "focus on priorities"appear to have set the tone for the upcoming Autumn Budget. Healey will seek to sustain the favorable public opinion atmosphere and rebound in approval ratings accumulated over the Burnham government's three months in office, while deferring the UK's most difficult and least popular issues to the future. It is understood that Healey will fund a short-term spending plan aimed at appealing to public opinion by raising bank taxes, to help voters and businesses under pressure from energy costs driven up by the US-Iran war. The Autumn Budget will also include a series of measures aimed at reducing regulatory burdens on businesses, such as simplifying corporate reporting requirements; the government will also extend import tariff suspensions for products in several sectors, including chemicals, plastics and hydrogen. At the same time, key issues such as welfare reform and long-term investment in defense will be deferred. James Nation, who served as special adviser to Sunak during his time as UK chancellor and prime minister and is now managing director at Forefront Advisers, said: "They have run the numbers and believe that, given everything else happening globally, this budget only needs to 'do no harm.' They do not want to take any measures that could disrupt the current situation." Healey is presenting the budget amid a severe market environment. Global borrowing costs have risen sharply amid expectations that the Middle East war will push up inflation, and the UK has been hit as well. When former chancellor Reeves last published a fiscal statement this spring, the UK Office for Budget Responsibility based its economic forecasts on a market situation in which the 10-year gilt yield was 4.5%. But in recent weeks, the 10-year gilt yield has risen as high as 5.5%, close to multi-decade highs, further worsening the economic outlook Healey faces. Therefore, one of the key decisions Healey must make is whether to rebuild the GBP23.6 billion fiscal headroom inherited from Reeves. That headroom has been eroded as borrowing costs have soared and debt interest payments have increased. According to people familiar with the matter, Healey is willing to accept a smaller fiscal buffer. The median forecast of major government bond dealers shows that the UK government's fiscal headroom will shrink by about one-third to GBP15.2 billion. Deciding to use part of the fiscal buffer reduces the pressure on Healey to choose between raising taxes and increasing spending. In fact, the UK's fiscal headroom had already shrunk substantially before the budget was published. In March this year, the UK government still had GBP23.6 billion in fiscal room, but amid the global bond selloff and rising borrowing costs, EY estimates it has fallen to about GBP11.3 billion, UBS estimates about GBP10 billion, and some fund managers even believe it may be only around GBP14 billion. The National Institute of Economic and Social Research (NIESR) noted that the 10-year gilt yield has risen about 110 basis points to 5.4% since the Middle East conflict, with about two-thirds of the increase potentially persistent, meaning a structural rise in borrowing costs is systematically compressing fiscal room for maneuver. The budget itself faces a gap of about GBP7 billion that needs to be filled: including a funding shortfall of about GBP4.7 billion in the defense plan and about GBP2 billion in cost-of-living subsidy spending. Since income tax, VAT and corporation tax have been ruled out as tax-raising options by political commitments, the feasible space is quite limited. According to reports, Healey has abandoned raising capital gains tax and instead made the bank tax the main revenue-raising tool. UBS expects the government to adopt smaller-scale measures such as a wealth tax, inheritance tax and an increase in the bank tax, while deferring difficult decisions on welfare and departmental spending until 2027. This means the budget is likely only to stabilize fiscal space temporarily rather than truly repair it. EY warns that if the Strait of Hormuz remains closed for a prolonged period and inflation rises to 6%, fiscal space could evaporate by a further GBP18 billion, turning into a deficit of about GBP7 billion and directly violating fiscal rules. Helen Miller, director of the Institute for Fiscal Studies, said in a statement: "For a plan to reduce borrowing and comply with fiscal rules to be credible, the chancellor must clearly set out overall spending totals, and those totals must be ones he is genuinely willing to adhere to. If it is just a paper arrangement of hidden cuts he has no intention of implementing, then this budget will amount to fiction." If Healey unveils a "stability-seeking" Autumn Budget, UK gilt yields could edge lower. Barclays strategists believe that for a new chancellor in an uncertain environment, a "bland" budget is actually the best outcome. UBS estimates that a budget complying with fiscal rules could remove the 15 to 20 basis points of extra risk premium already priced into 10-year gilts, with the "value" of compliance at about 20 basis points. Some large institutions have already bought gilts ahead of the budget, betting that Healey will stick to fiscal discipline. But if the budget disappoints the market, UK gilt yields could face upward risk. UBS points out that if the budget violates fiscal rules, the 10-year gilt yield could rise by 25 to 50 basis points. The more fundamental issue is that, as NIESR emphasizes, interest rates are now higher than the economic growth rate, and the debt arithmetic has shifted from a "tailwind" to a "headwind"even just keeping the debt/GDP ratio stable requires a larger primary surplus. If the budget responds to shocks by increasing borrowing, and the shocks themselves are persistent (energy prices, competition for capital from AI investment, global government borrowing demand), then the Bank of England will be forced to shoulder more of the tightening burden, further pushing up short-end rates and transmitting to the long end. The market will focus on how much "headroom" Healey retains in the budget. If the fiscal buffer can be maintained at around GBP14 billion to GBP15 billion, that may be enough to reassure the market; if it is significantly below that level, or if major spending decisions are systematically deferred to the 2027 spending review, investors may interpret it as "delay rather than solution" and demand a higher term premium. In short, this budget can hardly reverse the broad trend of narrowing fiscal space, but it can determine whether the market responds to that narrowing with "mild acceptance" or "punitive selling."