By Anchalee Worrachate Jan. 7 (Bloomberg) -- Britain may overwhelm bond investors with a record number of quarterly debt sales, risking the first failed auctions since 2002 as the economy sinks into the worst recession since World War II. “I’m not predicting that we will have failed auctions, but I can’t rule that out,” Robert Stheeman, chief executive officer of the U.K. Debt Management Office, or DMO, said in an interview last month. “It’s a big amount of debt to be sold. We are in a very different world than we were six months or a year ago. But I believe it’s a challenge that both we as an organization and the market will be able to meet.” The DMO, which oversees auctions of so-called gilts for the Treasury, today held the first of 20 sales earmarked for January through March, selling 2 billion pounds ($2.98 billion) of 4.75 percent bonds due 2038. The U.K. said it plans an unprecedented 146.4 billion pounds of debt sales in the fiscal year ending March 31 as Prime Minister Gordon Brown’s government seeks to finance bank bailouts and revive the shrinking economy amid a decline in tax revenue. The U.K. had two failed auctions in the past 10 years, the most recent in September 2002 when the DMO received bids for 95 percent of the 900 million pounds of 30-year inflation-protected bonds offered, according to the agency’s Web site. The other failure came in 1999, when it tried to sell 500 million pounds of inflation-protected bonds maturing in 2030. ‘Open Ears’ The London-based DMO held nine auctions in the first three months of last year and the first quarter average in the past five years was eight. A failed, or uncovered, auction, is “nothing more than a market event” that would show supply isn’t balanced against demand on the day of a sale, Stheeman, 49, who joined the DMO from Frankfurt-based Deutsche Bank AG in 2003, said Dec. 5. “What’s slightly different is if you have a series of failed auctions,” said Stheeman, whose first job as an 18-year- old apprentice at Vereins-und Westbank in Hamburg involved cutting the coupons off bond certificates so that interest payments could be cashed. “That means the program we have announced may need to be changed and we wouldn’t want that to happen. At a time like this, we have to have our ears very close to the market.” Auction Result The 2038 gilts sold today attracted bids 1.7 times the securities offered, the DMO said. The so-called yield tail, or the difference between the yield at the lowest accepted price minus the average price, was less than a basis point, indicating dealers generally bid at higher prices. The sale “met with a strong response,” Charles Diebel, head of European interest-rate strategy in London at Nomura, said in an e-mailed note today. “While the merits of this issue were clear, we have 10-year supply next week and with 51 billion pounds to get away in the first quarter, we are not convinced that consequent issues will fare as well.” Yields on 30-year gilts, which rose for a fourth day yesterday, fell one basis point to 3.97 percent after the auction. The price of the 4.75 percent security due in December 2038 climbed 0.22, or 2.2 pounds per 1,000-pound face amount, to 113.62. The U.K. issued 58.4 billion pounds of securities last year and 62.5 billion pounds the previous year. It has sold 94.67 billion pounds this fiscal year, leaving 51.73 billion pounds left to be issued, which would be a record for one quarter. Bond Competition The DMO is selling a record amount of debt as governments around the world increase borrowing. The U.S. may sell as much as $2 trillion this fiscal year ending Sept. 30, Treasury Assistant Secretary Karthik Ramanathan said Dec. 10, citing analysts’ estimates. Germany’s Federal Finance Agency will issue a record 323 billion euros ($434 billion) of debt including 149 billion euros in bonds, it said Dec. 18. Japan’s Ministry of Finance said Dec. 20 it will offer 113.3 trillion yen ($1.2 trillion) of bonds in the 12 months starting April 1, up from 106.3 trillion this fiscal year. Britain’s economy will probably contract 2.9 percent this year, the most since 1946, driving 32,300 companies out of business and doubling the number of people receiving jobless benefits to 2 million, the Centre for Economics and Business Research, a London-based study group, said on Jan. 1. ‘Enormous’ Issuance The median of 13 forecasts compiled by Bloomberg is for gross domestic product to fall 1.4 percent in 2009, from 0.8 percent growth in 2008 and 3 percent expansion in 2007. Brown, who took over as prime minister from Tony Blair in June 2007, unveiled a 50 billion-pound program in October to bolster the finances of three of the U.K.’s biggest banks as credit dried up amid $1 trillion of writedowns and losses worldwide by financial companies since the start of 2007. In November, he announced a 25.6 billion-pound package of tax cuts and spending increases. “It isn’t obvious to everybody the spending package will translate into an enormous size of debt issuance,” said Jason Simpson, a fixed-income strategist in London at Royal Bank of Scotland Group Plc, one of the 15 primary dealers that bid at government debt auctions. “Ultimately, that will have to be paid back. The DMO has been successful so far, but it’s conceivable an auction isn’t fully covered at some point.” The government was forced to increase its annual gilt- issuance plan twice as the nation’s budget deficit ballooned to 56.1 billion pounds in the first eight months of the year, the most since at least 1993 and double the 29.2 billion pounds a year earlier. In March, it expected to sell 80 billion pounds of debt. In October, it estimated 110 billion pounds of issuance. ‘Thrown Upside Down’ Gilt sales are unlikely to drop below 100 billion pounds anytime soon, according to Deutsche Bank, another primary dealer. Issuance will be 130 billion pounds next fiscal year and 140 billion pounds the year after, George Buckley, chief U.K. economist in London at Deutsche Bank, said Nov. 24, the day the government published its pre-budget report. “I don’t think anybody could have foreseen the overall quantum of financing that we have to raise,” said Stheeman. “In a strange way, the whole world has been thrown upside down” by the credit crisis, he said. Sales will be skewed toward securities maturing within seven years, the DMO said in November. Short-dated notes will account for 62.8 billion pounds, or 43 percent, of the issuance, medium-dated notes 23 percent and long-dated bonds 21 percent. Fourteen percent of the issuance will be inflation-protected bonds. Soaring demand for the safety of government bonds pushed down yields on two-year gilts about 330 basis points, or 3.30 percentage points, last year, the biggest annual decline since at least 1993. The DMO sold bonds due in 2011 at a yield of 2.57 percent on Dec. 18, the lowest level in almost 60 years. “Yields are so low that short-dated gilts offer no value at all,” said John Anderson, head of interest-rate investments in London at Rensburg Fund Management, which has about $3 billion of sterling-denominated assets. “There will only be huge appetite for bonds at these yield levels if you think the world is coming to an end.” To contact the reporter on this story: Anchalee Worrachate in London ataworrachate@bloomberg.net
Record U.K. Gilt Sales Raise Risk of Auction Failure (Update1)
Wednesday, 7 January 2009
Record U.K. Gilt Sales Raise Risk of Auction Failure Weve been telling you this for months!!!!!
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