British Bond Sale Failure Spooks ExpertsSean O'Grady
Investors may have lost some of their previously healthy appetite for British government debt: an auction for conventional (non index-linked) gilts has failed, for the first time since 1995.
The Debt Management Office (DMO), which is responsible for managing the Government's debt, said it had failed to attract enough bidders for its latest issue, some £1.75bn of gilts maturing in 2049.
Bids of £1.63bn were received, leaving the issue only 93 per cent covered, which is low by recent standards where demand has usually exceeded supply by a ratio of two to one. An issue of index-linked gilts had also gone uncovered in 2002, the DMO said. Tim Morgan, an analyst at Shore Capital, said the Government's cash requirement, including the money needed to redeem previous gilt issues, could hit £240bn.
He said Britain was running a risk of a "debt vortex", where the debt burden could become unsustainable. "It is by no means clear that this required sum can be realised, less still that it can be raised in sterling and at current low interest rates. The only sure way to avert debt-vortex risk would be to unveil major cuts in future public spending," Mr Morgan explained.
As Prime Minister Gordon Brown campaigns for more government spending to be pledged by the world's leading economies at next week's summit of the G20 nations, the markets are moving against him.
Steven Major, the head of global fixed-income research at HSBC, said last night: "The bond markets are increasingly worried about the large amounts of debt the UK is taking on, while poor inflation numbers add to worries on the economy."
Despite a careful approach by the Bank of England in its policy of quantitative easing—buying gilts to inject cash into the economy—and a promise to co-operate fully with the DMO to endure there is no clash in the timing of their activities, there appeared to be some annoyance among staff at the DMO that the Bank's policy had undermined the sale.
"Yields at these levels are not at all attractive," Robert Stheeman, the chief executive officer of the Debt Management Office, said yesterday. "Yields have shifted downward. Why have they shifted down? It's partly because of the Bank of England's announcement about quantitative easing."
Yields did in fact jump by some 20 basis points during trading yesterday, leaving the benchmark 10-year gilt yield at 3.32, before it fell back again later.
The fact that the long-dated gilts auctioned yesterday by the Government lay outside the Bank of England's quantitative easing gilt purchase programme—which targets gilts in the range of five- to 25-year maturities—is not reassuring, as it means that the "pure" institutional investor interest in this paper may not be healthy enough to sustain the vast scale of the gilts issue programme—£147.9bn or more in the coming financial year.
Long-term worries about inflation, the stability of Britain's finances and doubts apparently raised by Mr King in his testimony to MPs yesterday played a part.
Colin Ellis, an economist at Daiwa Securities added: "The failed auction probably wasn't only a reaction to Mr King's comments that the Bank might not spend the full £75bn on gilts—it's worth bearing in mind that Mervyn King is just one of nine MPC members who decide how much to spend.
"The long maturity of the bond is also likely to have been a significant factor, at a time when investors strongly favour short-dated paper."
The DMO insisted that it planned to stick to its issuance calendar. Mr Stheeman said: "The market does place a premium on us acting in a transparent way."
He added: "We will continue with our debt issuance plans and the Bank will decide what it wants to do in terms of monetary policy. For practical reasons, we have to ignore it."