Britain 5-year debt sale hits highest cost since 2008 before budget

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Britain 5-year debt sale highest cost

Highlights

Britain sold £4.5 billion of 4.625% March 2032 gilts at an average yield of 5.036%, the highest 5-year cost since 2008.
Dealers expect UK gross financing requirement to rise £27 billion to £334 billion for 2027/28, with modest near-term debt issuance increases post-budget.
Long-dated gilt issuance seen dropping to its lowest since 1990/91 in favor of cheaper short-dated debt, as OBR forecasts debt servicing costs to reach 3.8% of national income by decade's end.

Debt sale highlights pre-budget funding pressure

As reported by Reuters, citing the UK Debt Management Office, Britain sold £4.5 billion of 4.625% March 2032 gilts on Tuesday at an average yield of 5.036%. Investors bid for 3.51 times the amount on offer, a level that is in line with the strong demand for British government bonds this year.

The sale lands before finance minister John Healey's first annual budget on Wednesday and points to the pressure that higher market rates are placing on government borrowing costs. Earlier this month, 20- and 30-year gilt yields hit their highest levels since 1998, while 5- and 10-year yields reached their highest since 2008.

Higher yields reshape issuance outlook

Bond yields have surged across advanced economies since the start of the U.S.-Iran war, raising the cost of new sovereign borrowing as investors fear higher inflation and greater debt issuance linked to rising energy prices.

Dealers polled by Reuters last week expect only a modest increase in UK debt issuance in the current financial year after the budget, with a median £3.4 billion rise in gilt sales and a £5 billion increase in net Treasury bill sales. But they expect a larger £27 billion rise in the country's gross financing requirement for 2027/28, compared with the last official forecast in March, taking it to £334 billion.

They also expect long-dated gilt issuance this year to fall to its lowest since 1990/91 as the Debt Management Office targets cheaper short-dated financing. In March, before most of the jump in gilt yields, the Office for Budget Responsibility predicted Britain would spend 3.8% of national income servicing public debt by the end of the decade, nearly double the share seen in the 2010s.

In our previous report on sovereign borrowing risks in a higher-rate environment, we explained how persistent geopolitical tensions and elevated fiscal spending can keep funding costs high and intensify refinancing pressure for governments. We also noted that rising energy and food prices can prolong inflation strains, with emerging and frontier markets typically facing the sharpest vulnerability due to heavier interest burdens and narrower revenue bases.

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