Goldman Sachs analysts have cautioned that the United Kingdom's plan to increase the issuance of Treasury bills (T-bills) will provide only 'limited' fiscal improvement as the country faces sharply rising borrowing costs. The UK Debt Management Office recently announced several measures to ramp up T-bill issuance, including regular 12-month T-bill offerings, enhancements to repo facilities, and efforts to strengthen secondary market liquidity. These moves mark a shift from using T-bills primarily for cash management to a broader role in long-term debt management [1].
This development comes as yields on benchmark 10-year Gilts surged more than 10 basis points on Tuesday to reach 5.105%, while yields on 20-year and 30-year Gilts climbed to their highest levels since 1998, also rising by 10 basis points. The sharp increase in yields has brought the UK's borrowing costs into focus [1].
Goldman Sachs analysts, led by George Cole, noted that increasing the share of T-bills to around 10% of the UK's debt mix—aligning with the G10 average—would mean raising outstanding T-bills to approximately £296 billion from the current £94 billion. This could reduce annual funding costs by up to 10 basis points, or £3 billion. However, the analysts emphasized that this strategy would not be a 'magic bullet' for the UK's fiscal challenges, as it would also increase funding volatility and uncertainty in future fiscal projections. The cost-benefit trade-off is crucial, as a higher share of shorter-dated debt could save on interest costs but complicate budgetary planning [1].
Banks and financial institutions are currently the largest holders of T-bills, accounting for about £27 billion of the £94 billion outstanding. While there is potential for increased ownership, data indicates these institutions generally prefer medium-term Gilts over T-bills [1].
CONCLUSION
Goldman Sachs sees the UK's increased T-bill issuance as offering only modest fiscal benefits, with potential savings offset by greater funding volatility and uncertainty. The surge in Gilt yields underscores the ongoing challenges in managing the UK's borrowing costs. Overall, the strategy is unlikely to deliver a transformative impact on public finances or the Gilt market.