Scottish Government First entry to the bonds Market - £1.5billion of Borrowing

27th January 2026

The Scottish Government is making good progress towards its first bonds issuance in 2026-27, First Minister John Swinney has told financial services firms in London.

Speaking at an event at Scotland House London, the First Minister announced the next steps for the £1.5 billion bonds programme, which will provide financing for major capital projects across Scotland.

Procurement for book runners - the banks to act as joint lead managers for the bonds - and legal advisers will go live this week.

The firms selected will support delivery of a £1.5 billion bonds programme over five years, subject to the outcome of the Scottish election.

Last year the Scottish Government was given the same high credit rating as the UK, and better than Spain, Italy and Japan.

The strength and diversity of Scotland's economy, its strong institutional framework, as well as the Scottish Government's prudent financial management and low levels of debt were highlighted in the credit agency reports.

The First Minister said:

"Our intention is to make Scotland the most attractive destination for investment in the United Kingdom and our bonds programme is one of the ways we will do that.

"We also want to diversify our sources of borrowing so as to maximise value for money for Scotland’s taxpayers. A Scottish Government bond issuance will enable us to structure our debt more effectively - using the powers we have to borrow better, not more.

“Whilst specific issuance plans will be subject to market conditions closer to the time, these bonds will raise the funding needed to support delivery of the capital infrastructure projects outlined in our recently published Spending Review and Infrastructure Investment Pipeline."

Background

Outline Business case.

https://www.gov.scot/news/scottish-government-credit-rating-matches-uk/

Bonds are a standard form of borrowing for governments around the world and support spending including on major infrastructure projects, with buyers owed the value of the bond plus interest over a specific period of time.

The Scotland Act 2016 devolved powers to Scotland to allow the issuing of government bonds for capital investment. In 2023 the Scottish Government’s Investor Panel recommended making bonds available to market as a means of raising Scotland’s profile and attracting investment.

All proceeds from a future bond issuance would be used exclusively for capital investment in line with the capital borrowing powers outlined in the Fiscal Framework agreement between the Scottish and UK Governments.

The Scottish Government is being advised by EY.

The IOUs That Run a Country: How Government Bonds Really Work

When a government needs money—whether to fund public services, build infrastructure, or cover a budget deficit—it has two basic options: raise taxes or borrow. Most of the time, it borrows. The main way it does this is by issuing government bonds.

At their simplest, government bonds are IOUs.

What is a government bond?

A government bond is a loan from investors to the government. When you buy one, you are lending money to the state. In return, the government promises two things:

Regular interest payments (called the coupon)

Repayment of the original amount (the principal) on a fixed future date (the maturity)

In the UK, government bonds are called gilts. In the US they’re Treasuries. Other countries use similar instruments.

Why governments issue bonds

Governments issue bonds to:

Cover the gap when spending exceeds tax revenues

Spread the cost of long-term investments (like roads, hospitals, or defence)

Avoid sharp tax rises or spending cuts in a single year

Refinance old debt that is maturing

Importantly, governments don’t usually “pay off" all their debt at once. They roll it over, issuing new bonds to repay old ones.

Who buys government bonds?

Government bonds are bought by:

Pension funds (to provide stable, long-term returns)

Insurance companies

Banks

Central banks

Individual investors

They are popular because government bonds—especially from stable countries—are considered low risk. Governments can tax and, in most cases, print their own currency.

How interest on bonds works

Each bond has:

A face value (e.g. £100)

A coupon rate (e.g. 4%)

A maturity (e.g. 10 years)

If you hold a £100 bond with a 4% coupon:

You receive £4 per year

At maturity, you get back your £100

However, bonds can be bought and sold before maturity, and their market price changes.

Why bond prices go up and down

Bond prices move mainly because of interest rates:

When interest rates rise, existing bonds look less attractive → prices fall

When interest rates fall, existing bonds look better → prices rise

This is why rising rates can increase the cost of government borrowing: new bonds must offer higher interest to attract buyers.

What makes government bonds risky?

Although usually seen as safe, bonds are not risk-free. The main risks are:

Inflation risk: High inflation erodes the real value of interest payments

Interest rate risk: Bond prices fall when rates rise

Credit risk: The risk a government might default (low for countries like the UK, higher for some others)

Currency risk (for foreign buyers): Exchange rate movements can wipe out gains

The UK also issues index-linked gilts, where payments rise with inflation, reducing inflation risk for investors—but increasing costs for the government.

Why bond markets matter so much

Bond markets act as a discipline mechanism on governments. If investors lose confidence in a country’s finances:

They demand higher interest rates

Borrowing becomes more expensive

Public spending comes under pressure

This is why bond market reactions can shape government policy almost overnight.

How government debt is different from household debt

A key difference:

A household must eventually pay off its mortgage

A government does not need to eliminate its debt, only keep it manageable

As long as the economy grows and investors trust the government, debt can be sustained indefinitely.

The big picture

Government bonds are the plumbing of the modern state. They allow governments to function smoothly, spread costs over time, and respond to crises. But they also create long-term obligations, and when borrowing grows faster than the economy, the burden becomes heavier.

In short:

Bonds are how governments borrow

Interest rates determine how painful that borrowing is

Confidence is everything