Scotland now has its banks to price it's first bond, a Kilt. Bank of America, HSBC, NatWest and RBC have the inaugural mandate, with five more lenders on the wider programme, and the debut should land in the fourth quarter or early in 2027. After more than a decade of false starts, the deal is finally close. That does not make it a good idea.
Prospective UK prime minister Andy Burnham showed why on Monday. He promised the biggest rebalancing of power the country has seen, then in nearly the same breath signed up to the government's borrowing limits and pledged to shrink the welfare bill. That is devolution as a slogan paired with Treasury orthodoxy as a budget.
Real fiscal autonomy, what a bond investor cares about, was missing. Scotland sits in the same gap. It can sell a bond, but it still relies on Westminster grants for around 60% of its revenue, and it still borrows under a ceiling that the UK government sets, not the Scottish one.
So a Kilt rated level with the UK at Aa3/AA will still pay over Gilts. That is the puzzle the Scottish government has never quite answered. If the bonds were going to come flat to Gilts there would be little point issuing them, and because they will not, the first minister has to explain to Scottish voters why Edinburgh is paying a spread to raise money it could have drawn down more cheaply through the existing Treasury arrangements. The honest answer is that issuing at all is the goal, and the cost is secondary.
Look at where the Kilt might be priced and the strain shows. Investors and bankers have floated a spread of anywhere from 20bp to 40bp over Gilts, with no clean comparable to anchor it.
The government-guaranteed names like Saltaire Finance and LCR Finance sit tighter. The crown dependencies, Jersey, Guernsey and the Isle of Man, sit wider. Scotland lands somewhere in between, neither a sovereign nor a municipality, and the banks pricing it will have to weigh a bit of everything.
The wider sub-sovereign world does not help much either. France's Région Ile-de-France sold a 10 year this year at 10bp over OATs, and the Basque Government came at 4bp over Bonos. The German Länder pay around 25bp or more over Bunds, the Belgian regions nearer 40bp over OLOs, and the Australian states about 55bp over their govvie. Those issuers fund themselves from their own revenues and borrow freely against them. Scotland sets its income tax rates, but it cannot borrow on anything like the same terms, and Westminster decides how much and for what, so the comparison flatters it.
Then there is size. The programme is capped at £1.5bn over five years, against an annual borrowing limit near £480m. Each Kilt will come in corporate bond size and only flatter itself as a benchmark. At £300m or so, a chunk of the natural SSA buyer base cannot take part at all, which thins demand before the politics are even weighed.
The independence premium is the bit that gives the game away. Investors who have studied the idea say it has crept up since the May election. No ordinary funding tool prices in the break-up of a state. This one has to. S&P is open about it: it rates Scotland level with the UK only while Scotland stays inside the union's institutional framework, and it has warned that a serious move towards independence would put the rating under review.
There is a precedent for how this tends to end. The UK Municipal Bonds Agency was built to bring councils to the market, yet it managed only a couple of deals for Lancashire in 2020 before falling quiet, beaten by the cheaper and simpler loans the Treasury offers through the Public Works Loan Board. That same gravity pulls on Scotland. Cheap central government money is always there, and it is hard to issue against.
Buy the first Kilt for the novelty if you like, and many will. It will settle into a handful of buy and hold books and rarely trade after that. But do not mistake Scotland's programme, or Burnham's devolution push, for the start of a new sterling sub-sovereign bond market. Both are political projects in search of a bond to carry them.