Market volatility drives investors to rush into short-term bonds! The UK accordingly slashes long-term government bond issuance.

Jessica Pulay, chief executive of the UK Debt Management Office (DMO), said the office is further reducing issuance of long-term gilts to meet investor demand for shorter-dated government bondsdebt that is less affected by bond-market volatility. The DMO on Wednesday raised its gilt issuance plans for the fiscal year by several billion pounds, but the key move was to further shift the mix away from long-term debt toward shorter maturities, slashing long-term issuance to 15.5 billion ($20.8 billion) from about a third of the plan in April. Long-term gilts will now account for only about 6% of issuance this year, down sharply from 30% five years ago. In the UK, market signs show investor demand for Treasury bills is very strong. Bank of America said demand at the UK's weekly Treasury bill auctions has been consistently robust, and banks' holdings of Treasury bills have increased over the past few years. Assets under management at UK money market funds have grown rapidly. Such funds typically invest in short-term debt instruments issued by governments, banks and companies. "The demand for short-dated gilts is very strong," Jessica Pulay said in an interview. "I think it just reflects a continuing shift in investor demand." She noted that investor demand for shorter-dated gilts remains stronger than for longer maturities, "particularly given continued volatility in global bond markets, and that volatility has a particularly pronounced effect on longer-dated bonds." She added that, according to the DMO's assessment, shorter-dated bonds are a more cost-effective way to finance government spending than longer-dated bonds. The UK Debt Management Office sharply cuts the share of long-term gilt issuance The UK has been reducing long-term debt issuance, which has helped shorten the weighted average maturity of its gilts from about 17 years five years ago to about 11 years now. The importance of this shift has been further highlighted as the US-Iran war sent oil prices soaring, intensified inflation concerns and pushed the yield on 30-year UK gilts up to 6%. Since then, however, the gilt market has cooled somewhat. This week, after the Burnham government's first budget and the DMO's accompanying remit were broadly in line with market expectations, the gilt market rose modestly, further reinforcing expectations that the UK will shift toward issuing shorter-dated debt. "Shortening the weighted average maturity of new issuance has the potential to lower gilt yields, or reduce upward pressure on them. By issuing shorter-dated debt, the average interest cost can be reduced. In addition, by reducing issuance of instruments such as 10-year gilts, the financing rates on those bonds can also be lowered," said Mark Capleton, rates strategist at Bank of America. He added: "Shortening debt maturity is a trend we are watching globally, but no country needs to do it more than the UK." The shift to short-term debt has already shown some results. However, shortening borrowing maturities also carries risksdebt needs to be refinanced more frequently, leaving the government more exposed when interest rates rise. The DMO cancelled three regular long-term gilt auctions for the remainder of the fiscal year and published details of a Treasury bill issuance programme to start in January, responding to growing market demand for shorter-dated bonds. The plan will also be accompanied by a repo facility to support the new Treasury bill issuance programme. "Broadly, market participants want to see greater liquidity in the Treasury bill market," Jessica Pulay said. She noted that the repo market "has served the gilt market very efficiently for many years. So we think it is important to establish a similar mechanism for Treasury bills."