A quietly alarming revelation from the Office for Budget Responsibility (OBR) has placed a spotlight on a looming fiscal dilemma for the UK: the future of gilt demand.

As outlined in The Times, the long-term appetite for government bonds is set to decline dramatically, with pension schemes projected to reduce their gilt holdings from 30% of GDP today to just 11% by 2050. Strikingly, half of that decline is expected by the end of this decade. This structural shift reflects the broader dismantling of the final salary pensions era.

Defined benefit (DB) schemes, which once required long-dated, stable assets to match liabilities, are being replaced by defined contribution (DC) models that have no intrinsic need for gilts. As this transition accelerates, one of the UK’s most dependable sources of public borrowing demand is slipping away. The fiscal consequences are profound. With public debt hovering around 100% of GDP, even a modest increase in gilt yields could dramatically inflate debt servicing costs. The Times calculates that a rise of just 0.8 percentage points could add £22 billion annually to the interest bill - a figure that threatens to crowd out vital public investment and social spending. Worse still, it risks triggering a debt spiral, where higher interest costs themselves become a source of borrowing.

With around £100 billion in new borrowing required each year, the Treasury faces unenviable choices: issue fewer gilts, which undermines spending plans; or find new sources of demand. Neither path is politically simple. Current attempts to encourage pension funds to invest in infrastructure or adopt “nudging” tactics to promote long-duration bonds offer only partial, short-term relief. Meanwhile, the government's credibility hinges on maintaining a market-friendly fiscal posture. Enter the digital wildcard: stablecoins. These blockchain-based assets, pegged to fiat currencies and potentially backed by sovereign debt, are being discussed as an innovative channel for broadening gilt demand. If deployed intelligently, they could attract both retail and institutional investors, offering a more flexible, modern route into government-backed assets. Yet here, too, caution reigns. The Bank of England has shown reluctance, with Governor Andrew Bailey openly opposing the issuance of privately-backed stablecoins. His concern is undermining the monetary system’s core architecture. Instead, Bailey favours tokenised deposits anchored within existing banks, a model seen as safer, but arguably less transformative. The international context adds urgency as The United States is pressing ahead with stablecoin regulations that incorporate Treasury bond backing, while China, Singapore, and the EU advance central bank digital currency programmes.

By contrast, the UK risks falling behind, not only in digital finance innovation but in sustaining domestic demand for its sovereign debt. The challenge is therefore twofold. The UK must simultaneously manage a shrinking pool of traditional gilt buyers and decide whether to embrace financial modernisation. Without a cohesive policy framework, balancing innovation with monetary prudence, the risk is that a long-term fiscal gap opens beneath policymakers’ feet. In the face of dwindling institutional demand and rising borrowing costs, stablecoins offer a provocative but potentially necessary solution. Whether the UK has the political will and regulatory vision to grasp it remains to be seen.

Gilt Demand in Decline:

A Fiscal Timebomb

Josh Givelin-Davies

Financial Adviser

19th August 2025