The UK Treasury is exploring a significant increase in the bonds it sells to retail investors, a move that analysts say may draw in as much as £70 billion ($85.8 billion) for financing deficits in the coming years.
The move would help Chancellor of the Exchequer Jeremy Hunt raise money at a time of economic turmoil and alleviate the pressure on traditional investors, who are being asked to shoulder record sales of UK debt.
Luring in savings from households, which traditionally have limited access to the gilt market, would tap into some £1.7 trillion in deposits that swelled up when pandemic lockdowns prevented spending on leisure, hospitality and tourism.
“There is plenty of cash in the household sector in the UK that could potentially be put to work in other ways,” said Imogen Bachra, head of UK rates strategy at NatWest Markets. “We do see scope for some borrowing to be financed via bills and, more innovatively, through heavier reliance on retail investors.”
She said under the most optimistic scenario, the Treasury could raise up to £70 billion from households and short-dated bills. The more likely outcome is more in the range of £40 billion to £50 billion.
That’s still more than double the most previously raised through National Savings & Investments, the government bank that links with consumers. NS&I sells premium bonds and tax-free savings accounts and fed £23.8 billion to the Treasury in 2020-21.
Treasury and DMO staff met with banks to discuss using NS&I, to boost state funding from ordinary investors in 2023-24, a person with knowledge of the discussions said.
Treasury minister Andrew Griffith met with market makers who deal in UK government bonds, known as gilts, and the DMO on Jan. 23 to discuss funding needs for the next financial year and concerns that soaring sales could outstrip investor demand.
For the DMO, the move would bring in badly needed new buyers at a time when gilt sales are soaring. About £305 billion of gilts are due to be issued in the 2023-24 fiscal year. The Bank of England also is shedding £80 billion of gilts from its quantitative easing portfolio this year, including £45 billion of direct sales. Mark Capleton, a bond strategist at Bank of America, said he expects as much as £35 billion to be raised through NS&I next year, which is “very large compared to past years.” He said this would be about “diversifying the funding options” to help with a “very large financing need coming up.”
The financing plans of the DMO, which handles government debt sales, will be unveiled alongside the Treasury’s annual budget on March 15.
“The gilt market is deep and liquid, with a good track record of responding smoothly to increases in gilt supply,” a Treasury spokesperson said. “As a complement to support government financing, NS&I regularly reviews its products to ensure that it continues to balance the interests of savers, taxpayers and the broader retail financial services sector.”
Officials and the banks discussed the “potential for retail investors to contribute more significantly to meeting the overall financing requirement,” according to minutes from the meeting with Treasury officials released by the DMO.
It also said that gilt investors had suggested to the Treasury that “a greater contribution could be made to meeting the financing requirement by a combination of more Treasury bill issuance and higher retail financing.”