FINANCIAL TIMES 25.3.09 ISSUED at 1232 pm
Public finance fears hit gilts auction
By David Oakley, Capital Markets Correspondent
A UK government bond auction failed for the first time in seven years
on Wednesday as investors refused to buy the securities because of
worries over the country's deteriorating public finances.
Alarm over rising UK debt levels and renewed fears over inflation saw
investors shun the auction, with bids for the long-dated bonds, due
to mature in 2049, falling short of the £1.75bn wanted.
A warning by Mervyn King, the Bank of England governor, when he
cautioned the government from announcing a second stimulus package in
next month's Budget also sent shivers through the bond markets.
Steven Major, head of global fixed income research at HSBC, said:
"The bond markets are increasingly worried about the large amounts of
debt the UK is taking on, while poor inflation numbers added to
worries about the economy."
Consumer price inflation in February rose to 3.2 per cent from 3.0
per cent in January, confounding expectations that inflation would
fall to 2.6 per cent, while Mr King warned that the UK could not just
keep spending to pull the economy round.
The International Monetary Fund has forecast the UK budget deficit
will balloon to 11 per cent of national income in 2010, while the UK
Debt Management Office has said bond issuance will rise to a record
£147.9bn in the 2009-10 financial year.
It is the first time a conventional bond auction has failed since the
DMO was created in April 1998. The only other two failures were in
auctions for inflation-linked bonds, in September 2002 and April 1998.
The only auction failure of a conventional UK bond on record was in
September 1995. Most banks only hold records as far back as the early
1990s.
Gilt prices tumbled after the auction result, with the June future
dropping as much as 1.9 points on the day and the 40-year gilt yield
rising 8 basis points to 4.54 per cent.
Strategists said the lack of demand was also because the 40-year bond
was outside of the Bank of England's gilt buying programme. It plans
to buy up to £75bn of gilts in maturities between five and 25 years.
There are also growing worries that the government will increase bond
issuance even further in next month's Budget. Bond issuance for the
2009-10 financial year could rise to £200bn because of deteriorating
growth forecasts, analysts say.
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