The UK introduces "short-term debt prescription" to lower interest rates, Goldman Sachs pours cold water: limited effectiveness!

The UK government bond market is undergoing its most severe repricing since 2008, and the UK Debt Management Office (DMO) is trying to address it with a "short-term remedy" - increasing the issuance of short-term Treasury bills to reduce out-of-control borrowing costs. However, Goldman Sachs poured cold water on this remedy in its latest research report, stating that the effects of this remedy are "very limited," saving a maximum of 3 billion in interest expenses annually, but at the cost of increasing systemic financing volatility and exacerbating fiscal forecast uncertainties. This week, the UK's borrowing costs have become a focal point of attention. On Tuesday, the benchmark 10-year UK government bond yield surged over 10 basis points to 5.105%, reaching its highest level since June 2008. The 20-year and 30-year yields also rose to 5.12% and 5.80%, respectively, hitting their highest levels in nearly 30 years since 1998. Since the beginning of the year, the UK's 10-year government bond yield has risen by approximately 64 basis points, more than double the increase in US and German government bond yields during the same period. Among the major developed economies in the world, the UK's borrowing cost of 5.12% for 10-year bonds ranks at the top - compared to 4.45% for the more robust US economy and 3.10% for the stricter fiscal discipline of Germany. The UK is paying a higher "credit premium" for its dual political and economic vulnerabilities. In the face of rising yields, the UK DMO has introduced several measures, including plans to issue 12-month Treasury bills regularly, improve the Treasury bill repurchase mechanism, and enhance secondary market liquidity - all signs pointing towards upgrading Treasury bills from daily cash management tools to long-term debt management tools to lower overall financing costs. The "short debt gap" between the UK and the G10: a structural leap from 3% to 10% The UK's conservative use of short-term Treasury bills is almost an "outlier" among the G10 major economies. According to the DMO's 2025-26 Debt Management Report, by the end of 2024, Treasury bills accounted for only 3% of the UK central government's sterling-denominated debt (approximately 70.5 billion), far below other major economies like the US. G10 countries have an average short-term Treasury bill ratio of about 10%, with the US Treasury's ratio fluctuating around 20%. Historically, successive UK governments have tended to meet financing needs through the issuance of long-term gilts, a tradition that has kept the average maturity of UK government debt at a relatively high level - even after recent years of continued shortening, the average maturity of outstanding gilts was 13.4 years as of December 2025, compared to 16.5 years a decade ago. The root of this structural difference lies in profound changes on the demand side. Traditionally, UK pension funds and insurance companies were the most stable and important buyers of long-term gilts - they bought and held them almost "regardless of price." However, with the widespread surplus of Defined Benefit (DB) pension plans, their additional demand for ultra-long-term bonds has shrunk by nearly 40% compared to ten years ago. The Bank of England has also transitioned from a net buyer during quantitative easing periods to a net seller. In their place are more "price-sensitive" marginal buyers such as asset management companies, hedge funds, commercial banks, and overseas investors. As pointed out by Joe Maher, a macro analyst at Capital Economics, "the ownership structure of bonds has shifted from pension funds and the Bank of England to more price-sensitive buyers in recent times," exacerbating volatility in the UK bond market and raising systematic concerns about further increases in yields. Against the backdrop of this shifting demand structure, the DMO has begun a systemic adjustment of its issuance strategy. In the 2025/26 fiscal year, the DMO will increase the debt issuance size by 5 billion to 309 billion, but at the same time reduce the issuance of long-term gilts by 10 billion, while increasing the issuance of short-term Treasury bills. Market makers have also explicitly supported this direction - market makers in the gilt market stated in their annual consultation that the current fiscal year's bias towards short-term debt issuance should be continued into the next fiscal year, especially welcoming "a decrease in the weighted average issuance term." The issuance plan for fiscal year 2026-27, released in March of this year, further confirms this trend. The DMO has reduced its auction sales forecast for short-term gilts by 2.3 billion to 95 billion, mid-term gilts by 1.8 billion to 56 billion, and long-term gilts by 0.6 billion to 7.4 billion - but the net financing contribution of Treasury bills remains unchanged, implying a substantial increase in the proportion of Treasury bills in future fiscal years. Goldman Sachs' "cost-risk" ledger: the temptation of 30 billion annually In a recent research report, George Cole, Senior European Market Strategist at Goldman Sachs, and his team calculated the potential fiscal benefits of expanding Treasury bill issuance: if the UK were to increase its Treasury bill issuance ratio from the current approximately 3% to the G10 average of about 10%, the size would increase from the current 94 billion to around 296 billion, saving up to 10 basis points in financing costs annually, or about 30 billion. The logic behind this benefit lies in the natural shape of the yield curve - short-term rates are lower than long-term rates. As Treasury bills typically have maturities of less than a year and no coupon payments, their issuance rates are much lower than those of 10-year or even 30-year gilts. As the government gradually shortens its average debt maturity from over a decade, the structural decrease in average financing costs will result in significant interest expense savings. Royal Bank of Canada Capital Markets analysts predict that the average maturity of UK government bonds issued between July and September this year will fall to around 9 years, hitting a historical low. However, Goldman Sachs' analysis does not stop at measuring the "gross benefit" on paper, but goes further to dissect the structural costs of this strategy. Systemic increase in financing volatility. Short-term Treasury bills have shorter maturities and more frequent redemptions, meaning the government needs to return to the market more frequently for refinancing. Unlike long-term gilts that lock in rates for decades in a single issuance, the rolling maturity of Treasury bills makes the government's finances highly sensitive to short-term rate fluctuations - once the Bank of England enters a hiking cycle, the refinancing costs of Treasury bills will rapidly rise over a matter of months, unlike long-term bonds that only impact new issuances. As Royal Bank of Canada Capital Markets warns, in a backdrop of uncertainty about the Fed's interest rate path and disruptions from Trump's tariff policies on global capital flows, aggressively increasing the proportion of short-term debt is akin to "increasing voyages in a storm." DMO CEO Pulay bluntly outlined this risk at a parliamentary hearing in February: "Our debt management objective is to achieve long-term value I emphasize the 'long-term'" - "we must be very cautious about refinancing risk, as well as other risks such as liquidity risk and operational risk." Pulay specifically noted that while Treasury bills typically have lower interest costs than long-term bonds, they require more frequent resale to investors upon maturity - making them more susceptible to market turmoil and exposing public finances more rapidly to the risk of an interest rate increase by the Bank of England. Structural constraints on the demand side. In addition to assessing the potential financial benefits of expanding Treasury bill issuance, Goldman Sachs further analyzed the realistic constraints on the growth of Treasury bill demand. Banks and financial institutions are currently the largest holders of Treasury bills, holding approximately 27 billion, accounting for nearly one-third of the outstanding Treasury bill total of 94 billion. Although banks still have room to increase their holdings, data shows they are more inclined to hold mid-term gilts rather than concentrate further on the short end. Domestic household demand may still be limited - short-term UK bonds compete with ultra-short-term UK bonds, saving accounts, and tax-free Individual Savings Accounts (ISAs), which typically offer better tax advantages and liquidity for retail investors. Meanwhile, foreign investors are "unlikely to be a significant source of increased demand." Questioning the compression of risk premium effects. Cole raises a deeper question: "Can relying on short-term debt increase the credibility of maintaining low inflation and low interest rates? It is currently unclear whether increasing debt issuance will lead to a sustained decline in the risk premium of gilts." He points out that a similar argument applies to debt linked to inflation - this type of debt becomes a major source of interest rate cost fluctuations during periods of high inflation - and ultimately provides "preliminary evidence that these commitment mechanisms cannot eliminate the risks of rising interest rates and inflation, as well as increased volatility." This means that even if the UK were to increase the proportion of Treasury bills to 10% or higher, the interest savings brought about would likely be outweighed by the increase in financing volatility and the persistently high risk premium. Goldman Sachs summarizes this trade-off as: "The average improvement in interest costs needs to be balanced against the risk of increased financing volatility and the risk of increased uncertainty in future fiscal forecasts." Conclusion While the UK government is carefully calculating savings of 30 billion annually in interest expenses, a more fundamental question is emerging: UK government bonds - once considered one of the oldest safe assets in the world and the "risk-free pricing anchor" - are facing systemic challenges to their status. The repeated shocks of political instability, sustained inflation expectations, gradual loosening of fiscal discipline, and the shift in holder structure from "stable holders" to "price-sensitive traders" - these factors are combining to transform UK government bonds from the traditional "risk-free anchor" to a "compound risk asset." Neil Wilson, strategist at Saxo UK, issues a sharp warning: should the Labour Party adopt a leftward policy shift, the "bond guardians" will swiftly react, and in a moment where public finances are already fragile, energy prices are pushing up inflation, a leftward turn will trigger a strong rebound in the bond market. This highlights the deep-seated contradiction in the UK's debt management dilemma - whether issuing long-term or short-term debt, it is merely redistributing risks across different dimensions, rather than addressing the root cause of risk premium generation. Goldman Sachs' analysis ultimately concludes that the 30 billion in nominal savings is far from sufficient to offset the systemic costs brought about by the continuing expansion of political risk premiums. As long-term interest rates rise in sync across major global economies - with the US 30-year reaching 5% and Japan's 20-year hitting near 30-year highs - the UK, with its dual political and energy vulnerabilities, is being asked to pay a higher premium for compound risk. This is a crisis of trust around the "pricing anchor," and merely adjusting the debt maturity structure is far from enough to rebuild this trust.