A drop in pensioner life expectancy since Covid has helped to fuel record demand for Labour’s first government bond sale, according to experts.
Investors placed £110bn of orders for a £8bn bond sale on Tuesday, the first gilt issue since Sir Keir Starmer became Prime Minister. The level of demand was the highest ever recorded in proportion to the size of the sale, according to an analysis by Bloomberg.
The Debt Management Office (DMO) was selling 15-year gilts that will mature in January 2040, paying an interest rate of 4.375pc. Market participants said the relatively short duration of the debt explained the demand.
Megum Muhic, vice president at RBC Capital Markets, said falling life expectancies in retirement meant UK pension funds were racing to buy 15-year bonds, instead of the 25-year bonds, so that they could realise their investment gains sooner.
Mr Muhic said: “Pension funds are very big buyers of long-dated gilts and their average liabilities have been getting shorter as average life expectancies in retirement have been getting shorter.”
The average life expectancy for a man in Britain aged 65 dropped from 23 years to 21.5 between 2015 and the end of 2023. For women of the same age, it fell from 25.5 years to less than 24, according to the Institute and Faculty of Actuaries.
Around half of this drop off has occurred since the pandemic but the trend began before Covid.
“It is a big shift going on. There are a lot more buyers in this sector, their focus has shifted from 25-year [bonds],” Mr Muhic said.
On the surface, record levels of demand look like a boost for Chancellor Rachel Reeves, who has pledged to “get to grips with the public finances” and plug a £22bn blackhole in the public finances. However, analysts said the figures were not representative of a vote of confidence in the government.
Althea Spinozzi, head of fixed income strategy at Saxo Bank, said: “I completely dismiss that idea. We know that fiscal spending will continue to be high.”
Instead, investors are betting that the rate offered on the bonds will offer good value as the Bank of England continues to cut interest rates, Ms Spinozzi said.
The high levels of demand will also have little impact on government borrowing costs as these are determined primarily by Bank Rate expectations.
Mr Muhic said: “It is expectations on what the Bank of England will do that drives 95pc of government borrowing costs.”