U.K. 10-Year Bonds Halt Two-Day Advance Before Gilt Auctions

  • Ten-year gilts underperform German bunds, Treasuries Monday
  • DMO to sell more than 5 billion pounds of bonds this week

U.K. government bonds halted a two-day advance before traders face sales of 5.25 billion pounds ($7.5 billion) of coupon-bearing debt this week, the first gilt auctions of the 2016-2017 financial year.

Benchmark 10-year gilts underperformed their U.S. and German counterparts. The Debt Management Office plans to auction 2.75 billion pounds of securities due in January 2021 on Tuesday and 2.5 billion pounds of bonds maturing in July 2026 two days later. Gilts are still the best performers among developed-nation sovereign debt this year as the risk Britain will vote to leave the European Union in a June 23 referendum has boosted demand for safe assets.

“This supply doubleheader still represents a substantial amount of cash for investors to find,” Jason Simpson, a strategist at Societe Generale SA in London, wrote in a note. “There is a good chance that gilts will underperform other fixed-income markets” in the next two weeks, he said.

Gilts paused last week’s rally as the FTSE 100 Index of shares advanced for the first time in three days. The U.K. debt office previously auctioned conventional gilts on March 8, when it allotted 1.25 billion pounds of bonds due in July 2052. The DMO has since twice sold index-linked securities, via an auction on March 10 and a so-called mini-tender on March 23.

The 10-year gilt yield rose one basis point, or 0.01 percentage point, to 1.42 percent as of 4:24 p.m. London time, after declining three basis points over the previous two days. The price of the 2 percent security due in September 2025 was 105.10 percent of face value.

Bunds, Treasuries

German 10-year bund yields were little changed at 0.13 percent Monday, while similar-maturity Treasuries yielded 1.77 percent.

The DMO has requested that primary dealers in gilts increase the amount of securities they bid for at auction to a rolling six-month average of 5 percent to ensure smooth sales.

While the DMO has said that gilt-edged market makers, or financial institutions which make a market in U.K. sovereign securities, should purchase at least 2 percent of gilts issued, it has never set an expectation on bids. The move, which takes effect this month, is to ensure that the price formation process at auctions is as effective as possible, according to DMO spokesman Steve Whiting.

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