The U.K. government is considering increasing its issuance of shorter-term debt, specifically Treasury bills (T-bills), to manage rising borrowing costs. However, analysts from Goldman Sachs caution that this strategy may only provide limited fiscal benefits. Historically, the U.K. has issued fewer T-bills compared to its G10 counterparts, preferring longer-dated Gilts for funding.
Recently, the U.K.'s Debt Management Office announced plans to enhance T-bill issuance, including regular 12-month T-bills and improved liquidity in the secondary market. This comes as yields on 10-year Gilts have surged above 5%, reaching levels not seen since 1998.
Goldman Sachs analysts, led by George Cole, noted that while increasing T-bill issuance could help manage government cash flow and potentially lower annual funding costs by up to £3 billion, it also introduces greater funding volatility, complicating budgetary planning. They estimate that raising T-bill issuance to 10% of the total debt could reduce interest costs by about 10 basis points.
However, they emphasize that this approach is unlikely to significantly transform the U.K. gilt market or resolve public finance issues. The current holders of T-bills are primarily banks, which may prefer medium-term Gilts, and domestic demand could be limited due to competition from other investment options.
Furthermore, foreign investors are not expected to significantly increase their demand for T-bills. Cole raised concerns about whether relying on short-dated debt could effectively maintain low inflation and interest rates, suggesting that the risks associated with higher rates and inflation remain significant