We predicted in October that the government could suffer an uncovered gilt auction within months because it was trying to raise such a vast amount of money from the bond markets.
From Bloomberg a few minutes ago:
UK government bonds slumped, extending three days of losses, after an auction of 40-year gilts failed to meet the amount of debt the Treasury offered. Investors bid for 1.63 billion pounds ($2.4 billion) of
notes, lower than the 1.75 billion pounds of 4.25 percent notes the Treasury had slated to sell, the UK Debt Management Office said today.
“Basically it’s the first failed auction,” said John Wraith, head of sterling interest-rate strategy at RBC Capital Markets in London. “They didn’t receive enough to cover it all so the market’s obviously sold off extremely heavily.”
UK bonds fell, pushing the yield on the 10-year gilt 10 basis points higher to 3.43 percent by 11:02 a.m. in London.
It may be too early to gauge how bad this is for the government. The man in charge of gilt issuance told MPs last year there had been no uncovered auctions for seven years; but one wouldn’t be the end of the world. A “series” of uncovered auctions would be much more disturbing.
The news will add to the discomfort following Mervyn King’s warning yesterday on another fiscal stimulus package in the Budget.
Steven Major, head of global fixed income research at HSBC, said: “The bond markets are increasingly worried about the large amounts of debt the UK is taking on, while poor inflation numbers added to worries about the economy.”
UPDATE
A fresh gilt auction on Thursday has gone well, easily covered by investors – proving that one swallow doesn’t make a summer, etc. Attention will still be focused on the next round of auctions, however.
Jim Pickard
Kiran Stacey