Views from the LDI Desk – April 2025

Responsive Issuance – The DMO's Revised Remit Reflects Market Realities

Estimated reading time: 5 minutes

In a signal that the UK Debt Management Office (DMO) is closely attuned to evolving market conditions, the agency revised its 2025–26 financing remit on 23 April, maintaining the total size of gilt issuance despite a larger borrowing need by increasing T bill issuance but also making a material shift in the composition of gilt issuance. The significant redistribution away from long-dated bonds and toward shorter-dated maturities marks an important development for liability-driven investors.

The steepness of the UK yield curve has become a focal point in recent months, with long-end gilt yields remaining elevated even as near-term inflation expectations moderate. Against this backdrop, the DMO's latest move offers insights into how they may position themselves in future in response to market pricing—and what this could mean for pension schemes managing interest rate and inflation exposures over long horizons.

A Meaningful Shift in Structure

The DMO’s updated remit, announced on 23 April 2025, maintained the total planned gilt sales for 2025–26 at £299.1 billion, a modest reduction on the previous remit, but introduced meaningful reallocations across maturity buckets. The most important change was a significant shift away from long-dated issuance and toward short-dated gilts, driven by a steep yield curve and evolving investor demand.

At a Glance – Key Changes in the April 2025 DMO Remit

This redistribution shifts the composition of the remit meaningfully: short-dated gilts now represent over 39% of total issuance, while long-dated gilts account for just 10% — a marked reduction from nearly 20% in 2024s Autumn statement remit. Medium-dated and index-linked allocations remain steady, while unallocated is increased, allowing the DMO to be reactive to future market developments and demand trends.

The DMO explicitly cited “prevailing market conditions, including the relative cost of issuance across the maturity spectrum” as key drivers for the adjustment. For LDI investors, this reinforces the message that the DMO is both responsive and pragmatic, adapting its strategy in light of ongoing steepness in the yield curve and investor positioning.

Long gilt issuance allocation has continued to shrink since its peak around 10 years ago

Yield Curve Pressures and the Long-End Dilemma

The UK yield curve has remained unusually steep by recent standards, with 30-year gilt yields staying well above 10-year and 2-year equivalents. While the gilt curve is towards its steepest level over the past decade, if we go back further there were periods where the level was more extreme, particularly when the UK was battling the fiscal fallout of the Global Financial Crisis.

Gilt yields and yield curve steepness remain close to recent highs

This steepness, driven by a mix of supply dynamics, inflation persistence, and central bank uncertainty, has real consequences for pension schemes. For schemes running LDI strategies, especially those still navigating post-2022 leverage and collateral regulation adjustments, a persistently steep curve can complicate hedge implementation and maintenance of collateral resilience.

Importantly, this phenomenon is not isolated to the UK. Yield curve steepening has been mirrored in the US, where questions around central bank independence and the emergence of tariff-driven trade policy risks have introduced new uncertainties for global investors.

Gilts has steepened more than Bunds or Treasuries during recent market volatility

These developments have raised questions around the durability of Treasuries’ traditional safe-haven status, driving investors to demand greater term premia and contributing to steeper sovereign curves on both sides of the Atlantic. For UK pension schemes, this global backdrop adds another layer of complexity when interpreting local curve moves and adjusting hedging strategies accordingly.

Debate remains over whether the rise in US term premia and curve steepening has peaked. A model maintained by the Federal Reserve that monitors term premium over time shows that were we to revert to levels of term premium seen historically, this could have someway left to run. Were this to be true, further pressure could come on long dated UK gilts and the steepness of the curve given gilts typically trade with a relatively high correlation to Treasuries, with both countries facing fiscal challenges.

Term Premium returning to the US Treasury market but remains at low levels relative to history

Shorter Duration, Strategic Flexibility

By increasing the volume of short-dated gilt issuance, the DMO appears to be taking advantage of relatively attractive pricing at the short end of the curve, where funding costs remain relatively low vs. the long end and increasing expectation of rate cuts have dragged short-dated yields lower. This strategy offers several benefits:

• Reduces upward pressure on long-end yields, easing a key concern for long-duration investors.
• Improves liquidity in the short end, potentially aligning with institutional demand, particularly from overseas reserve managers who may be seeking to diversify away from Treasuries and Dollar assets.
• Preserves flexibility, as shorter maturities offer quicker refinancing cycles and more agility in adapting to fiscal or market shifts.

At the same time, the greater tilt toward short-dated gilts may increase the near-term rollover risk for the government.

From a pension scheme perspective, the reduction in long-dated gilt supply may help support more stable pricing in the instruments most directly linked to liability valuation and hedge construction. This may help with confidence around structuring end game solutions or deploying excess collateral buffers.

Issuance as a Curve Management Tool?

This remit revision sets a notable precedent: the DMO has signalled its willingness to adjust issuance strategy based on prevailing market pricing, not just fiscal considerations. While it is not a central bank and does not target yields, the DMO has demonstrated that it will not ignore adverse market signals—particularly when long-end yields reach levels that may be inefficient for the Exchequer or disruptive to institutional investors.

In effect, this creates a form of passive curve management. If steepening pressures resume or accelerate, there is now a clear reference point suggesting that the DMO could again shift issuance down the curve. This potential response mechanism may serve to moderate the risk of disorderly long-end steepening, even if it cannot eliminate it. Were US yield curves to continue steepening it is likely UK yields would follow suit, but at the least the DMO might be pushing against that if this is reflected in future remits.

Conclusion: Flexibility Where It Matters Most

The 2025–26 revision to the DMO’s financing remit underscores a more dynamic approach to debt issuance—one that recognises the complex interplay between market pricing, investor demand, and fiscal responsibility. While the overall size of issuance has held steady, the shift in structure marks a meaningful evolution in how supply-side decisions are made.

For trustees and LDI managers, this is a positive development. A more responsive DMO adds an element of predictability to an otherwise uncertain environment—especially at the long end of the curve where schemes are exposed from a collateral and leverage perspective to any sudden increases in yields if supply is not well digested by the market.

Schemes should continue to be cautious about the risk of steeper curves and higher long-term yields when setting strategy, but this bold action by the DMO is a positive development.

The opinions expressed are as of April 2025 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative. There is no guarantee that any forecasts made will come to pass.

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