By David Milliken
LONDON (Reuters) – Britain attracted the strongest investor demand since 2005 for its government bonds on Tuesday, when it kicked off a record period of debt issuance to fund higher spending on measures to fight the coronavirus.
Britain held two bond auctions in a day for the first time, and aims to sell 45 billion pounds ($55.6 billion) of government bonds this month – far outstripping the previous record of 28 billion pounds set in July 2009 during the financial crisis.
Investors briefly became unsettled at the potential scale of borrowing last month as panic about the impact of COVID-19 swept global markets, and British borrowing costs had looked on course for the biggest rise since the 1998 emerging market debt crisis.
But the gilt market rapidly regained its poise after the Bank of England said it would buy 200 billion pounds of assets – mostly gilts – to support the economy through its quantitative easing programme.
Both Tuesday’s gilt auctions saw investors bid for more than three times the volume of gilts on offer, in contrast to normal bidding which sees auctions around two times oversubscribed.
The sale of 1.25 billion pounds of the benchmark 40-year gilt <GB40YT=RR>, maturing in July 2057, had a bid-to-cover ratio of 3.13, the highest of any auction since 2005.
The launch of a new 2023 gilt <GBT0E23=>, with an initial size of 3.25 billion pounds, saw the gilt sell with an average yield of 0.204%, a record low for a conventional gilt auction.
At both auctions, successful bids clustered around a narrow range, indicating more stable market conditions.
Gilt prices were little changed on the day overall, gaining slightly after the second auction and outperforming U.S. and German bonds, which started the day lower.
On Wednesday the United Kingdom Debt Management Office plans to sell a further 4.75 billion pounds of gilts in nominal terms, split between a 5-year and a 10-year gilt.
The BoE, for its part, will buy 13.5 billion pounds of gilts this week, though not the same ones being sold by the DMO.
New BoE Governor Andrew Bailey has stressed that the BoE is not engaged in ‘monetary financing’ – an irreversible commitment to fund public borrowing – and that its purchases are aimed at keeping inflation on target, and ultimately reversible.
However, he left the door open to buying gilts direct from the DMO if market conditions deteriorated and the BoE needed to step in to ensure the financial system functioned smoothly.
Last month the DMO said it would issue at least 156 billion pounds of gilts during 2020/21 to fund government borrowing and refinance existing debt, but added there was likely to be an upward revision when it updates this estimate on April 23.
Citi forecasts gross gilt issuance could reach a record 285 billion pounds in the current financial year.
As well as a shortfall in tax revenue from the economic shutdown imposed to slow the spread of COVID-19, Britain has guaranteed a large chunk of wages for many workers.
The cost of this and other measures announced is likely to exceed 60 billion pounds even with a short lockdown and limited take-up by businesses.
(Reporting by David Milliken, editing by William Schomberg and Andy Bruce)