Autumn Budget 2026: Healey will buy some time with the bond markets
Ahead of the upcoming Budget, the Debt Management Office’s financing choices and shifting market demands pose a critical test for government borrowing stability, says Helen Thomas
Another year, another Budget. The same party remains in charge, but a fresh cast of characters will deliver it, bringing fresh uncertainty over the government’s economic direction. For John Healey, the first Chancellor to bear that surname since Denis Healey’s unfortunate encounter with the IMF in 1976, the incentive to “do no harm” is particularly strong.
Yet the officials whose announcements could matter most to financial markets on Wednesday sit a short distance from Downing Street, at 21 Mincing Lane. The Debt Management Office will update the government’s financing plans for this financial year, alongside projections of the demands to come.
This is consequential small print. Ministers decide how much to tax and spend but it is the DMO who arranges the borrowing that makes those decisions possible. Working within the Treasury’s remit, it manages the mix of gilts, their maturities and the timetable of auctions. Its choices help determine how readily the government can find buyers, and how much refinancing risk taxpayers carry.
Recently, that has meant retreating from the long end of the market. Bonds offering certainty over several decades once found natural buyers among pension funds. As that demand has diminished, selling long-dated debt has become more challenging.
The latest Reuters poll of gilt dealers suggests bonds maturing in more than 15 years will account for just around 7 per cent of issuance, a significant fall from more than 30 per cent just five years ago. The same dealers expect the net contribution from Treasury bills to double from £5bn to £10bn this year.
Trade-offs
There is a trade-off. Shorter borrowing can match investor appetite today but must be refinanced sooner. The government exchanges some immediate funding pressure for greater exposure to whatever interest rates prevail when the debt comes due. If inflation proves stubborn, that can become an expensive bargain.
September offered a reminder of how quickly the environment can change. Ten-year US Treasury yields recorded their biggest monthly rise since September 2022, the month of Britain’s mini-Budget crisis. The forces unsettling bond markets now extend far beyond Westminster.
Governments have substantial deficits to finance and old debt to replace. France plans €340bn of medium- and long-term issuance next year, net of buybacks, up from €310bn this year. Its debt agency attributes much of the increased financing requirement to maturing bonds issued through the pandemic and energy crises. Yesterday’s emergency borrowing is becoming tomorrow’s refinancing problem.
Germany’s planned securities issuance this year exceeds €512bn, roughly a fifth above last year and two-and-a-half times its pre-pandemic level. Even Europe’s benchmark borrower is surpassing the volumes seen during the pandemic and energy crises, as defence and infrastructure spending add to its financing demands.
Nor do governments have the market to themselves. The hyperscalers are financing data centres, chips and power supplies on a scale that is changing corporate bond markets. According to Goldman Sachs, their bond issuance to date this year has already doubled from last year’s $108bn. Companies once able to finance their ambitions from abundant cash flows are becoming substantial competitors for investors’ capital.
The appetite extends into riskier credit. SoftBank hit a record when they raised $11.1bn in a high-yield bond offering in September; within a week, Paramount Skydance’s junk-bond deal had eclipsed this, reaching approximately $12.4bn. These are formidable transactions even before the wider borrowing needed to finance acquisitions and artificial intelligence is counted.
Sovereign and corporate bonds are not interchangeable. But investors can compare their returns, adjust allocations and demand better compensation for committing capital. Higher yields attract buyers but they also create an incentive to wait if still higher yields seem likely. Nobody wants to catch a falling knife.
This is where inflation could make already difficult fiscal arithmetic worse. Another Middle East energy shock would squeeze real incomes and growth while increasing pressure for government support. Inflation-linked debt becomes more expensive; benefits and pensions can rise; persistent price pressures can keep interest rates higher. As cheap debt matures, refinancing it at higher yields adds to the interest bill.
Inflation can also lift nominal tax receipts and erode the real value of fixed-rate debt. But a supply shock brings no guarantee that those gains will outweigh the costs. If interest spending increases borrowing, and that additional borrowing itself attracts higher yields, the adjustment becomes progressively harder.
Healey therefore needs Wednesday’s financing numbers to reassure the market. Dealers expect full-year gross gilt sales to rise by £3.4bn to £249.6bn; for next year they expect the gross financing requirement, before contributions such as NS&I, to reach roughly £334bn, £27bn above March’s projection. Lower-than-expected figures could usher in a gilt relief rally. Markets, after all, are still places where buyers and sellers meet: less debt for investors to absorb can mean higher prices. For all the attention paid to fiscal headroom, it rests on forecasts and spending promises that may never survive contact with political reality. The DMO’s issuance plans can also change, but they provide a much more concrete guide to what investors will actually be asked to finance.
A relief rally would give Healey a successful first Budget and Burnham another reason to consider an early election. But the government would still have to refinance its debts, compete with other borrowers and absorb the cost of any renewed inflation shock. Shortening maturities brings those tests around more often. Wednesday may deliver a reassuring verdict from the bond market; the government’s growing dependence on its next verdict will remain.
Helen Thomas is founder and CEO of Blonde Money