The changing maturity composition of gilt issuance

The UK government meets the bulk of its financing needs through issuing gilts across a variety of maturities. In recent years, the fiscal position has become increasingly sensitive to movements in interest rates. The stock of public debt has risen sharply from 28.3 per cent of GDP at the start of the century to 95.5 per cent in 2023-24, and is forecast to rise to 96.1 per cent in 2029-30. This necessitates substantial volumes of debt redemptions each year as existing gilts mature and require refinancing at the current interest rate on gilts.

Compounding this, the increased proportion of short-term gilts in the Government’s overall debt portfolio means that a larger fraction of the total debt is subject to more frequent refinancing. The share of either short or ultra-short gilts issued has risen from 29 per cent in the 10 years prior to the pandemic to 34 per cent in the three years following the pandemic, reducing the share of longer-maturity debt (Chart B). This has shifted the average maturity of the stock of debt from 16 years in 2017-18 to less than 15 years in 2023-24, increasing the sensitivity of debt interest costs to changes in short-term interest rates. Shorter-maturity gilts adjust more quickly to Bank Rate relative to longer-maturity gilts and so as the average maturity of the stock of debt falls, its sensitivity to interest rates rises.

A similar shift has been seen in a number of advanced economies. As noted by the OECD, between 2022 and 2023, this shift was present in 19 of 38 OECD members including Canada, France, Germany, and the USA, where a large increase in short-term debt issuance has come alongside the need to finance sustained high deficits.^a In 14 of the 38 countries short-term borrowing fell, while it remained stable in the remaining 5 countries.

Chart 6B: Gilt issuance by maturity and average maturity of the gilt stock

Demand for short- versus long-maturity gilts can reflect investor sentiment regarding the economy and fiscal conditions. A shift towards shorter issuance may reflect changes to:

• Risk appetite – when investors feel more risk-averse they may prefer shorter maturities, to reduce their risk and increase liquidity.
• Inflation expectations – during periods of heightened inflation risk, investors may prefer shorter maturities to avoid the risk of default and inflation reducing real returns over the long term.
• Market structure – in the UK, defined benefit pension funds have been significant purchasers of the longest-maturity gilts which match their long-term cashflow liabilities. As the defined benefit sector matures and declines in size this is likely to reduce demand for longer-maturity assets.

All of these factors are likely to have contributed, in the period during and since the pandemic, to the greater demand for shorter-issuance debt relative to longer-issuance debt, observed by the Debt Management Office.^b One implication of switching to shorter maturity debt is that more gross issuance will be required in each year, increasing government’s exposure to changes in interest rates, some of which may be transitory. Any rise in debt interest could outweigh the potential benefits of a slightly lower average funding cost from skewing issuance to shorter dated gilts. We plan to look in more depth at longer-term trends that could affect the demand for gilts in our 2025 Fiscal risks and sustainability report.