Britain issues costliest 5-year debt since 2008 before budget

Britain Issues Highest 5-Year Debt Yield Since 2008 Ahead of Budget Announcement

Britain's 5-Year Debt Sale and Market Context

By David Milliken

Record Yield in Latest Debt Auction

LONDON, Oct 27 (Reuters) - Britain sold £4.5 billion ($6.0 billion) of 5-year debt on Tuesday, paying an average yield of 5.036%, the highest since 2008, and showing the bond market pressure on finance minister John Healey before his first annual budget on Wednesday.

Investor Demand Remains Strong

Investors bid for 3.51 times the volume on offer of the 4.625% March 2032 gilt, the UK Debt Management Office said, typical of the strong demand for British government bonds this year.

Global Bond Yield Surge and Its Drivers

Bond yields have surged across advanced economies since the start of the US-Iran war, pushing up the cost of new government borrowing, as investors fear higher inflation and debt issuance due to the jump in energy prices.

Historical Context of Gilt Yields

Earlier this month, 20- and 30-year gilt yields hit their highest since 1998, while 5- and 10-year yields reached their highest since 2008.

Expectations for Future Debt Issuance

Gilt dealers polled by Reuters last week expect only a modest increase in debt issuance this financial year after the budget, pencilling in a median £3.4 billion rise in gilt sales and a £5 billion increase in net sales of Treasury bills.

Gross Financing Requirement Outlook

Forecasts for 2027/28

But they see a chunkier £27 billion rise in the country's gross financing requirement for 2027/28, compared with the last official forecast in March, to £334 billion. They also expect long-dated gilt issuance this year to fall to its lowest since 1990/91 as the DMO targets cheaper shorter-dated financing.

Debt Servicing Costs

In March, before most of the rise in gilt yields, the UK Office for Budget Responsibility predicted Britain would spend 3.8% of national income servicing public debt by the end of the decade, nearly twice as much as in the 2010s.

($1 = 0.7505 pounds)

(Reporting by David MillikenEditing by William Schomberg)