U.K. Locks in Record Yields for 53 Years as BOE Outlook Shifts

As investors bring forward bets on the timing of the Bank of England’s first interest-rate increase since 2007, the U.K. locked in record-low borrowing costs for the next 53 years.

The Debt Management Office auctioned 1.5 billion pounds ($2.3 billion) of government bonds due in July 2068 on Tuesday. The securities were sold to yield 2.623 percent, compared with the previous record-low auction yield of 3.28 percent for equivalent-maturity debt set in 2012.

Benchmark 10-year gilt yields dropped the most since October on Tuesday, while the pound strengthened through 71 pence per euro for the first time since December 2007 as the European Central Bank’s extended bond-buying plan entered a second day. Locking in lower borrowing costs is increasingly important for the U.K. government, as concerns of an uncertain election outcome in May have helped make gilts the second-worst performing developed-bond market this year.

“It could easily be close to mid-year before we have more very long bond supply,” said Jason Simpson, a fixed-income strategist at Societe Generale SA in London. “It does seem like the path of least resistance is for higher yields. We are looking for the Fed to hike in June and that can only increase speculation that the BOE will not be far behind,” he said, referring to the U.S. Federal Reserve.

U.K. 10-year yields fell 12 basis points, or 0.12 percentage point, to 1.82 percent as of 3:44 p.m. London time, the biggest decline since Oct. 15. The 5 percent gilt due in March 2025 rose 1.24, or 12.40 pounds per 1,000-pound face amount, to 128.97. The yield on the July 2068 bonds dropped seven basis points in the secondary market to 2.59 percent.

Rate Outlook

Investors are currently fully pricing a 25 basis-point increase in U.K. borrowing costs by March 2016, compared with April as recently as last week, according to MPC-dated forward Sonia fixings data provided by ICAP Plc. That assumes the current four basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises rates, which have been at a record 0.5 percent since March 2009.

Further denting the appeal of gilts is the U.K. election on May 7, which looks set to be the tightest since the 1970s. Polls show the Tories and Labour are both on course to fall short of a parliamentary majority. That means either one would need a coalition partner to govern, increasing the potential for policy surprises.

Gilts lost 1.7 percent this year through Monday, the worst performer after securities from the Pacific Rim in Bloomberg World Bond Indexes. German debt returned 2.4 percent and Treasuries earned 0.1 percent, the indexes show.

The pound appreciated 1 percent to 71 pence per euro and touched 70.95 pence, the strongest level since December 2007. Sterling fell 0.3 percent to $1.5079.

Before it's here, it's on the Bloomberg Terminal.