U.K.'s Long-Dated Linker Sale Shows Gilts Are Still Sought After

  • Re-opening of 2068 bond attracted 7.8 bln pounds of orders
  • Shows how syndicated sales resilient as auction bidding drops

It’s not all doom and gloom in the U.K. government bond market.

That’s what the Debt Management Office demonstrated with the latest offering of its inflation-linked bond maturing 53 years from now. The sale attracted 7.8 billion pounds ($12 billion) of orders, against the 2.5 billion pounds actually sold. The DMO increased the size of the issue “given the strength and quality of demand,” it said in a statement Tuesday.

The deal reflects how orders in gilt sales conducted through banks have consistently outstripped supply since 2009, even as primary dealers have reduced bids at bond auctions.

“They never seem to have trouble covering the whole book and usually they sell more than they were initially intending,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA, one of the primary dealers which trade directly with the DMO. “There’ve been no issues with the syndicated method of distribution of bonds.”

The average order book in gilt syndications has been 13.5 billion pounds so far this fiscal year, on track to exceed the 14 billion pounds in 2014-15, according to data sent by the DMO on Monday.

Falling Demand

Auctions have meanwhile seen deteriorating appetite. The bid-to-cover ratio -- a gauge of demand relative to the amounts allotted -- fell to an average of 1.59 times this year. That’s the lowest since at least 2008-2009 and partly reflects changes in regulations that have made banks reluctant to buy large amounts at auction. The data from the DMO cover auctions of both conventional and index-linked bonds across all maturities.

Foreign investors remain keen buyers of U.K. debt, despite the prospect of an interest-rate increase by the Bank of England. Higher rates tend to reduce the allure of the fixed payments offered by bonds.

Overseas money managers bought a net 13.3 billion pounds of gilts in July, the most since they took on 14.8 billion in March, according to the BOE.

Demand was underpinned by the rout in emerging markets and China’s surprise devaluation last month, which fueled a flight to safer assets.

Long Term

Long-dated gilts have generated strong appetite. An offering of securities due 2068 sold in July attracted record demand for an ultra-long gilt offering, with more than 15 billion pounds of orders received for the 4 billion-pound transaction, DMO Chief Executive Robert Stheeman said at the time.

As for the latest deal, linkers have proved to be a solid bet this year.

U.K. inflation-linked securities with maturities of at least 15 years earned investors 3.2 percent in 2015 through Monday, compared with a 0.7 percent gain across the gilt market, according to Bank of America Merrill Lynch indexes.

And the 2068 linkers which the U.K. has already issued climbed as the DMO re-opened the offering.

The real yield on the 0.125 percent bond dropped one basis point, or 0.01 percentage point, to minus 0.91 percent as of 2:51 p.m. London time. That’s down from a three-month high of minus 0.71 percent on June 22.

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