UBS raises UK gilt supply outlook on slower borrowing

Investing.com -- UBS expects the UK Debt Management Office to issue £271 billion in gilts for the 2026-27 fiscal year, down from the current year as net borrowing and redemptions decline, according to its latest research note.

The bank projects the remit will include around £20 billion in long-dated gilts and £34 billion in inflation-linked securities. In a note on Wednesday, UBS said extending supply beyond 10 years is not cost effective given current yield curve conditions, where 10-year funding costs approximately 4.3% but locking in an additional 10 years would require a marginal rate near 6%.

The firm said long-term real yields offer better value because breakevens are high.

Gilt supply has already slowed by roughly half in duration terms from its peak in the second quarter of 2025. UBS said the pace should average around £21 billion per month in 10-year equivalents during 2026-27, compared to peak monthly supply near £45 billion in mid-2025.

Through February 24, the DMO raised £285.8 billion in cash through gilt sales, leaving £17.9 billion to fulfill the current remit.

Budget execution surprised positively in January, with tax receipts approximately £6 billion above Office for Budget Responsibility projections and expenditure £3.2 billion lower.

UBS said an overfund for the current fiscal year appears likely, which would reduce the Net Funding Requirement for 2026-27 by an estimated £4 billion compared to current projections.

The bank expects unallocated supply to remain high at £27 billion, or 10% of the total remit, though it said the market should assume most unallocated issuance will ultimately be delivered in short and medium-dated gilts.

UBS said if its projections prove accurate, long gilts should see a positive market reaction.

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