Gilts Rally as BOE Pays Record Premium for Longer-Dated Debt

  • Central bank paid as much as 202 pence above market prices
  • Yields on 30-year bonds fall to lowest since day record set

U.K. government bonds rose after the Bank of England was forced to pay above the odds to entice investors to part with longer-dated gilts in its latest buyback operation.

Yields on 30-year securities tumbled to the lowest since Aug. 11, the day they reached a record low, after the BOE paid a premium on all the bonds it purchased in its 1.17 billion-pound ($1.5 billion) reverse auction of gilts longer than 15 years.

The highest price paid was 202 pence over the market level, according to data compiled by Bloomberg. Before today, 151 pence was the biggest premium. The BOE received offers for 2.08 times the amount of bonds it sought, up from a coverage ratio of 1.54 in its buyback of similar securities last week.

The BOE’s rebooted quantitative-easing program has had mixed results. Of the three previous repurchasing operations in this so-called bucket, one failed to attract sufficient bids and last week’s also saw the central bank pay above market prices. While buybacks of shorter-maturity gilts have proceeded with few issues, holders of longer-dated debt have proven to be reluctant sellers due to the higher returns the securities pay in a world where so many government bonds have sub-zero yields.

“It indicated that investors weren’t prepared to sell at market levels in sufficient size,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London, before the results of today’s buyback. “There are still plenty of bonds available for the Bank of England, but in the early weeks of the renewed bout of QE, the market just has to find the right clearing levels.”

Benchmark 30-year gilt yields fell three basis points, or 0.03 percentage point, to 1.24 percent as of the 5 p.m. London-time close. They slumped earlier to 1.21 percent, the lowest since the record 1.185 percent reached about three weeks ago. The 3.5 percent security due January 2045 rose 0.815, or 8.15 pounds per 1,000-pound face amount, to 153.86. Two- and 10-year notes also rallied.

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