Proposal to buy back Covid-era gilts could slash part of UK’s £50bn budget gap, fund manager says
Rathbones bond chief suggests government repurchase low-coupon long-dated gilts and reissue shorter-dated debt to reduce headline debt totals without raising taxes
A proposal from a bond fund manager to repurchase low-coupon gilts issued during the 2020 Covid crisis could, he says, eliminate a sizeable slice of the UK’s reported £50 billion fiscal shortfall without new taxes or immediate spending cuts.
Bryn Jones, head of fixed income at wealth manager Rathbones, set out the plan in comments reported by Jeff Prestridge of the Daily Mail. Jones argued the government should consider buying back certain long-dated gilts that were sold when interest rates were near zero, cancelling that old debt and funding the operation by issuing shorter-dated paper.
Jones used the Treasury 0.5% 22/10/61 gilt, issued in May 2020, as an illustration. That issue raised just under £26.5 billion when interest rates were close to 0.1%. With market interest rates now around 4%, the price of the gilt has fallen to about £25 in the secondary market, creating a situation in which the government could, in Jones’s view, repurchase the outstanding stock for roughly £6.6 billion and thereby reduce the headline debt obligation by roughly £20 billion.
He suggested that the buyback could be financed by issuing about £6.6 billion of new ten-year gilts, which he said have recently attracted strong investor demand. Jones also identified about 10 UK gilts with coupons below 1.5% and maturities between 2035 and 2072 that he believes could be candidates for similar treatment; he estimated that repurchasing those issues could reduce the government’s debt stock by around £130 billion in nominal terms.
Officials at the Debt Management Office routinely conduct buybacks and switches, but Jones’s recommendation would be notable for the scale and for the explicit aim of replacing long, low-coupon liabilities with shorter-dated, higher-coupon paper. Proponents say the approach reduces the headline face value of long-term liabilities and can better align the maturity profile of public debt with current market conditions.
Jones acknowledged that holders of the older gilts would likely incur capital losses if the government bought them at current market prices. He said offering a premium above market levels could blunt investor discontent while still leaving the government better placed on a net debt basis than under the current structure. He also argued that cancelling low-coupon gilts would reduce an incentive some wealthy investors have used to shelter savings, noting that gilts are exempt from capital gains tax and that low coupon instruments can produce capital gains as prices recover toward par at maturity.
The idea was pitched ahead of Chancellor Rachel Reeves’s budget, scheduled for Nov. 26. The proposal’s feasibility would depend on Treasury and Debt Management Office assessments of market impact, financing costs and legal and operational considerations. Jones characterized the plan as decisive and urged ministers to consider it as an alternative to tax increases or spending cuts.
The proposal was reported by Jeff Prestridge in the Daily Mail and attributed to Bryn Jones of Rathbones. The Treasury has not adopted the plan publicly.