June 15 (Bloomberg) -- Britain plans to sell as much as 5 billion pounds ($8.2 billion) of bonds through banks this week, according to the U.K. Debt Management Office, as government borrowing surges to a record to fund economic stimulus packages.

The “indicative range being talked about is 3 to 5 billion pounds,” Steve Whiting, a spokesman for the debt agency in London, said today. The sale is planned for tomorrow, he said. The debt office hired Barclays Plc, Goldman Sachs Group Inc., HSBC Holdings Plc and Royal Bank of Scotland Group Plc to offer the 4.50 percent gilt due September 2034, it said on June 9.

The first so-called syndication since 2005 for the U.K. is part of a record 220 billion pounds the Treasury aims to raise this year to finance an expanding budget deficit as the recession crimps tax receipts. Chancellor of the Exchequer Alistair Darling said on April 22 the budget shortfall in the year through March 2010 will reach 12.4 percent of gross domestic product, the most among the Group of 20 nations.

“I’ve never seen a level of government debt quite like this, not even in the worst days of the 1970s,” said Stephen Lewis, chief economist at Monument Securities in London. “Costs of borrowing will have to rise. The Debt Management Office will need all the help it can get to take these bonds to the market successfully. It’s a stiff task.”

Outlook Cut

The yield on the bond due 2036 rose to 4.69 percent last week, the highest since Jan. 23. It was little changed today at 4.68 percent before scheduled debt purchases by the central bank, leaving it 90 basis points higher than at the end of 2008.

Yields on longer maturity government bonds in the U.S., Germany and the U.K. have risen faster than those for shorter- term debt on concern supply will swamp demand and record low interest rates will fuel inflation, eroding the value of fixed- income payments.

Standard & Poor’s cut the outlook on the U.K.’s AAA rating to “negative” from “stable” on May 21, citing the country’s increasing debt burden. Darling said in April the deficit will reach 175 billion pounds this year.

The debt office didn’t find enough buyers at its 40-year gilt auction on March 25, the first so-called uncovered sale since 2002. Selling bonds through banks rather than at auctions may reduce the risk of failure. Issuers pay underwriters fees to sell the securities directly to investors such as pension funds and insurance companies after determining demand and prices.

This week’s sale is the first of as many as eight syndicated offerings this year, which may raise as much as 25 billion pounds. The last similar transaction was four years ago when the government introduced 50-year inflation-linked securities.

‘Good Time’

The success of syndicated debt offerings in Europe this year may bode well for the U.K., according to PJ Bye, head of public-sector syndicate in London at HSBC, one of four banks managing the transaction.

Greece, the second-most indebted European Union nation, sold 8 billion euros ($11 billion) of 10-year bonds through banks, the Public Debt Management Agency said on June 2. The notes were sold to yield 187 basis points more than benchmark German debt, compared with 302 basis points at a sale in March. Ireland, Belgium and Spain also used banks for sales this year.

“It’s a good time to come to the market as investors currently have high liquidity to put into top-grade assets, as witnessed by the very strong response for recent syndicated government issues in the euro zone,” Bye said.

Austrian Sale

Austria said today it plans to raise 2 billion euros ($2.8 billion) of bonds through a syndicated deal.

The increase in borrowing by the U.K., the U.S. and members of the euro region means the British debt agency may have to offer the bond at a higher yield to attract buyers.

“I can’t say I find a stunning value in long-dated gilts at this point,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London. “I might buy if the yield backed up a bit to above 4.75 percent.”

Speculation the Bank of England will extend its quantitative-easing program, in which it’s printing money to buy assets, may bolster demand for the 25-year bond, according to John Wraith, head of sterling interest-rate products in London at RBC Capital Markets, one of 16 primary dealers for gilts.

Policy makers voted in March to buy government bonds with maturities of between five and 25 years as they seek to revive the economy by pushing down long-term interest rates and boosting the money supply.

The bank anticipates spending 125 billion pounds on the program by August, it said on May 7. Prime Minister Gordon Brown’s government authorized as much as 150 billion pounds.

“If you think the Bank of England will continue the program, then this bond is a buy,” said Wraith. “There’s a possibility it will become eligible for quantitative-easing purchases in the next three months because at that point it will be less than 25 years to maturity. Pension funds still need to buy long-dated bonds so the sale should go well.”

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net.

Last Updated: June 15, 2009 10:19 EDT