UK Borrowing Set to Rise as Bond Dealers Eye 2027 Needs

British government bond dealers expect only a modest increase in debt issuance following the government’s upcoming budget on October 28, while forecasting higher borrowing requirements in the 2027/28 financial year, according to a Reuters poll. The findings suggest that the government faces growing financing pressures as it balances spending commitments, fiscal targets and changing demand for UK Government Bonds.

A survey of all 15 wholesale primary dealers in British government bonds found that the UK Debt Management Office (DMO) is expected to increase its planned gross gilt issuance for the 2026/27 financial year by £3.4 billion to £249.6 billion. The issuance plan was last updated in April 2026.

Dealers also expect a further shift away from long-dated government bonds towards shorter- and medium-dated securities. At the same time, the government is likely to rely more heavily on Treasury bills to manage its financing needs, reflecting changes in investor demand and the structure of the UK debt market.

The outlook comes ahead of the first annual budget presented by finance minister John Healey on October 28. Market participants will be watching not only the immediate borrowing figures but also the government’s plans for financing future spending and maintaining its longer-term fiscal commitments.

UK Debt Issuance Expected to Rise Modestly After Budget

The median forecast in the Reuters poll puts gross gilt issuance for 2026/27 at £249.6 billion, compared with the DMO’s existing plan of £246.2 billion. The expected increase is relatively small, indicating that dealers do not anticipate a major immediate change in the government’s borrowing programme following the budget.

Moyeen Islam, a fixed-income strategist at Barclays, said market participants should not expect major surprises from the announcement. He added that investors would focus on changes to the composition of government debt issuance and whether the government’s medium-term financing requirements are supported by a credible fiscal strategy.

For bond investors, the composition of issuance can be as important as the overall amount of debt sold. Different maturities carry different interest-rate risks, and changes in the supply of short-, medium- and long-dated gilts can influence investor demand and government borrowing costs.

The budget will therefore be assessed in terms of both the immediate financing requirement and the government’s plans for managing debt over the coming years.

Treasury Bill Issuance Expected to Double

Dealers expect net issuance of short-dated Treasury bills to increase to £10 billion in 2026/27, up from £5 billion under the existing DMO plan. Treasury bills are short-term government securities that can help authorities manage fluctuations in financing needs during the financial year.

Unlike conventional gilts, which can have maturities ranging from several years to several decades, Treasury bills are short-term instruments. Governments can use them to manage cash balances and address changes in the timing of receipts and expenditure.

The growing importance of Treasury bills is also linked to the government’s plans to expand the market. Following a review earlier in 2026, the government intends to issue a 12-month Treasury bill in early 2027 and work towards increasing the overall size of the market.

Treasury bills currently account for approximately 3% of UK government financing, compared with around 5% in Germany and more than 20% in the United States, according to the figures in the report. The planned expansion could give the UK government greater flexibility in managing short-term funding requirements.

RBC expects net Treasury bill financing to reach £25 billion in the 2027/28 financial year. This remains a forecast rather than a confirmed issuance target, but it indicates that dealers expect short-term borrowing instruments to play a larger role in the government’s financing strategy.

Long-Dated Gilt Issuance Set to Fall to Lowest Share Since 1990

One of the most significant expected changes concerns long-dated gilts, which are UK government bonds with maturities of more than 15 years. Dealers expect these securities to account for approximately 7% of total gilt issuance, down from 11% in the previous year and more than 30% in 2021.

If the forecast materialises, the share of long-dated bonds would reach its lowest level since 1990. The expected reduction reflects a longer-term shift in the structure of UK government borrowing and a decline in demand from domestic pension funds, which historically have been important buyers of long-maturity government debt.

Long-dated gilts were once a central feature of the UK’s debt management strategy. By issuing bonds with very long maturities, the government could lock in financing for extended periods and maintain a longer average debt maturity than many other major economies.

However, investor demand for these securities has changed. Long-dated bonds are particularly sensitive to changes in long-term interest rates and inflation expectations, making them more exposed to market volatility when investors demand higher returns for holding government debt over extended periods.

Earlier in October, 20-year and 30-year gilt yields reached their highest levels since 1998 amid a global bond-market selloff. Concerns about elevated borrowing across advanced economies and inflation pressures associated with the US-Iran war contributed to the wider market environment described in the report.

As demand for long-maturity securities weakens, the DMO is expected to place greater emphasis on short- and medium-dated bonds, while maintaining a smaller allocation to long-dated issuance.

UK Borrowing Forecasts Rise for 2026/27 and 2027/28

Beyond the immediate budget outlook, dealers expect public-sector net borrowing to be revised upwards for both 2026/27 and 2027/28 compared with the forecasts published in March.

The Reuters poll points to a £14 billion upward revision to public-sector net borrowing for 2026/27 and a £16 billion increase for 2027/28. These projected changes indicate that the government’s financing needs could be higher than previously anticipated.

The gross financing requirement for 2027/28 is expected to rise to approximately £334 billion, compared with £307.6 billion in the March estimate. Gross financing requirements provide a closer indication of the amount the government needs to raise through gilt and Treasury bill sales, although they are not identical to the budget deficit.

Despite the projected increases in borrowing, the deficit is still expected to decline over the period covered by the forecasts. Public-sector net borrowing is projected to fall from around £129 billion in 2026/27 to £112 billion in 2027/28.

If realised, that would represent the lowest deficit as a share of gross domestic product since the COVID-19 pandemic. However, the expected decline does not remove the pressure created by higher financing requirements or the challenge of meeting longer-term fiscal targets.

UK Government’s Fiscal Headroom Expected to Narrow

The budget is also expected to reduce the government’s fiscal headroom, the financial margin available to meet its fiscal rules if economic conditions or public finances deteriorate.

Healey’s headroom against a longer-term target requiring non-investment spending to be balanced against tax revenue by 2029/30 is expected to fall to £15 billion from the £24 billion forecast in March.

The projected £15 billion margin is slightly above the £12 billion median estimated in a Reuters poll of economists conducted the previous week. Nevertheless, economists expect the available headroom to face further pressure as inflation affects government finances and limits the room available for future spending decisions.

A smaller fiscal margin leaves the government with less flexibility to respond to unexpected economic developments without making adjustments to taxation, spending or borrowing plans. It can also increase the importance of delivering credible medium-term fiscal forecasts.

Higher inflation can complicate budget planning by increasing the cost of public services and government commitments. If spending requirements rise faster than available revenues, policymakers may have to consider difficult choices to remain within their fiscal framework.

Spending Review Could Become More Challenging in 2027

Market participants expect the government’s fiscal challenges to extend beyond the October budget, particularly as officials prepare for the next spending review.

James Moberly, a UK economist at Goldman Sachs, said the budget could be relatively low-key but warned that it would likely set the stage for a difficult spending review the following year. He highlighted the tight nature of existing departmental spending plans and the challenge of funding higher expenditure without an improvement in the economic outlook.

The spending review will be important because government departments must operate within the resources allocated to them. If costs rise while fiscal headroom narrows, the government could face pressure to reconsider spending priorities or identify additional sources of revenue.

The balance between public services, infrastructure investment and fiscal discipline is therefore likely to remain a central issue for the government’s economic strategy.

UK Gilt Issuance Forecasts for 2026/27 and 2027/28

The Reuters poll indicates that the expected financing mix is changing, with a greater share of issuance allocated to short- and medium-dated gilts and a smaller proportion assigned to long-dated bonds.

The figures represent market expectations from the Reuters poll and the DMO’s earlier issuance plan. They are not all confirmed government decisions, and the final borrowing programme may change after the budget.

What the Budget Means for UK Bond Markets

The October 28 budget is expected to provide investors with more information about the government’s borrowing plans, the composition of gilt issuance and its strategy for managing public finances over the medium term.

The expected increase in overall issuance is modest for the current financial year, but forecasts point to greater financing requirements in 2027/28. At the same time, the expected reduction in long-dated gilt supply and expansion of Treasury bill issuance suggest that the government is adapting its borrowing strategy to changing market conditions.

Investors will also monitor how the government responds to the narrowing fiscal headroom and the potential pressure on departmental spending. The credibility of the government’s fiscal plans may influence market confidence, while movements in inflation and interest-rate expectations could continue to affect gilt yields.

For now, the Reuters poll suggests that the immediate budget announcement may bring limited changes to the overall borrowing programme, even as longer-term financing pressures remain in focus.

Currency conversion: $1 was equivalent to £0.7464.