Record bid ‘sends a strong message’ about gilt market

The UK Debt Management Office’s first public sale of the year impressed with an unprecedented level of demand despite a huge sell-off in gilts over recent months.

On 21 January, the UK DMO raised £8.5bn via a syndicated re-opening of the 4.4% 2040 gilt led by Deutsche Bank, JP Morgan, Morgan Stanley, Nomura and RBC Capital Markets. The deal closed with total orders of just over £119bn from 279 accounts, making it a record gilt sale from both the size of demand and the number of investors in the order book.

The record level of demand was particularly notable given the gilt market’s recent period of volatility, with yields reaching their highest level in decades. Gilt yields have been under pressure, not just from a global sell-off in government bonds driven in part by US inflationary concerns, but also issues pertaining to the UK itself, such as Labour’s spending ambition, higher borrowing and stagflation fears.

Highest yields in decades

Yields on 30-year gilts passed 5.5% in January 2025, reaching their highest level since 1998, while 10-year yields touched 4.9%. While the sell-off has eased in recent weeks, 30-year and 10-year gilts are still at elevated levels. The higher yields would have inevitably helped attract more demand, with the yield on the syndicated tap at just over 5%.

‘It is fair to say this transaction provides a clear and visible demonstration of the excellent support we continue to receive from our gilt market investor base,’ said Jessica Pulay, chief executive officer of the UK DMO. ‘It also sends a strong message about the ongoing smooth and efficient functioning of the gilt market.’

The deal was executed smoothly and quickly with the order book closing at 10:00am and the price setting at just before midday.

Strong support from international investors

Another notable feature of the transaction was the support from international investors, allocated 32% of the sale, which was also marginally a record for a UK syndication. The allocation to international accounts from the last two gilt syndications were at 27% and 13% respectively, with issuances in November and September.

‘We welcome the diversification of our investor base,’ said Pulay. Foreign investors have become the biggest segment of the overall gilt portfolio. The growth of international investors has occurred in parallel with gilts having a bigger share in global bond indices as well as an increased share of sterling in central bank reserves.

Following the latest syndication, total gilt sales for the 2024-25 financial year have reached £229.7bn. This is the second-highest annual issuance by the UK DMO after 2020-21, when extra funds were raised to support the economy during the Covid-19 pandemic. However, accounting for the fact that there is no quantitative easing stimulus but rather £100bn worth of quantitative tightening over the next year by the Bank of England, this will be a record amount of gilts entering the hands of private investors.

The UK’s penultimate syndication of the financial year will take place in the week commencing 10 February, with the launch of a new conventional gilt maturing in March 2035.

Reduced duration

On 20 January, officials from the UK DMO and the UK Treasury held their annual consultation meetings with gilt-edged market makers and gilts investors to review the financing remit of the current financial year and provide feedback for 2025-26.

The minutes published by the UK DMO showed that among GEMMs and gilt investors, there was strong support for a reduction in the duration of conventional gilt issuance in 2025-26 relative to the current year. Most who were present advocated for an increased proportion of short-term and medium-term gilts and a proportionate reduction in long-term gilts.

The financing remit for the UK DMO in 2025-26 is currently projected to be £299.6bn.

Burhan Khadbai is Head of Content, Sovereign Debt Institute at OMFIF.