U.K. Bonds Rise Most in Six Weeks After Debt Sale, BOE Buyback

  • DMO sells 2.5 billion pounds of gilts due in July 2047
  • Debt office allots 30-year bonds at lowest yield on record

U.K. 10-year bonds rose the most in six weeks as demand increased at an auction of longer-dated gilts and investors offered fewer securities to the Bank of England in its latest buyback operation.

The Debt Management Office sold 2.5 billion pounds ($3.2 billion) of gilts due in July 2047 at an average yield of 1.529 percent, the lowest on record. Investors bid for 1.92 times the amount of debt allotted, compared with 1.37 at the last auction of 30-year gilts on June 7.

The BOE bought 1.17 billion pounds of gilts maturing in more than 15 years via its Asset Purchase Facility. Investors offered 3.18 billion pounds of securities, lowering the so-called offer cover to 2.72 times from 3.21 at the equivalent operation held last week.

Money managers have been asking for more longer-dated bond auctions, according to minutes released Aug. 23 of a meeting between the debt office, gilt market makers and investors, with some calling for sales of securities due in more than 50 years.

“What you’ve seen in the last couple of weeks after the buybacks is that, because there’s been a lot of bonds offered fairly cheaply to the Bank of England is that the long end has sold off,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “That wasn’t really the case” in Tuesday’s buyback. “People are holding onto their bonds a bit harder, which is why I think the market has gone on rallying after it.”

Yield Slide

Benchmark 10-year gilt yields fell six basis points, or 0.06 percentage point, to 0.81 percent as of 3:38 p.m. London time, the steepest decline since Aug. 4. The 1.5 percent security due in July 2026 rose 0.61, or 6.10 pounds per 1,000-pound face amount, to 106.47. Yields on 30-year gilts dropped six basis points to 1.54 percent, after sliding to 1.52 percent, the lowest since Sept. 13.

Sovereign bonds advanced as investors awaited interest-rate decisions from Japan and the U.S. on Wednesday.

Gilts climbed with their euro-area, U.S. and Japanese counterparts as futures traders priced in about a 20 percent chance the Federal Reserve will increase rates by 0.25 percentage point. There’s less consensus about what the Bank of Japan will do. The U.K. bonds sold by the DMO Tuesday aren’t eligible for the BOE reverse auction.

“Yields should be a bit lower than they are at the moment, but whether they specifically react to the Fed and the Bank of Japan will depend on what they do,” UBS’s Wraith said.

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