Pimco may be cutting its holdings of UK debt and be fretting about the 80 per cent chance of a ratings downgrade, but there are plenty of other investors keen to get their hands on government paper – if Wednesday’s auction of £4bn of 2015 gilts is anything to go by.
The issue was covered 2.68 times – more than the equivalent auction in December – and the highest yield paid was 3.082 per cent, according to a release from the Debt Management Office.
But note, the strong demand is not entirely surprisingly. Indeed, it was predicted by many commentators.
Here’s Marc Ostwald at Monument Securities from earlier today.
The £4.0 Bln 2.75% 2015 UK Gilt auction should be well received, given the pressure on UK banks to buy the so-called high grade quality assets that Gilts are meant to be on their bank capital books, with the patent cheapness of the stock relative to its peers, and the very steep profile of the front of the UK Gilt curve offering obvious attractions. The fact that there is a short-dated QE buyback this afternoon only makes the likelihood of solid demand even more likely.
Nonetheless, in the wake of auction the yield on the 10-year gilt (which hit 4.11 per cent over the festive period) was back below 4 per cent. (It is now a touch over).
Meanwhile, over on FT Alphaville’s sister blog, Money Supply, Chris Giles reckons no rating agency would dare downgrade UK debt when it can fund itself so easily and cheaply.
He also notes:
The rise in UK government bond yields since the Christmas period started has been matched in other countries and in the 5- and 10- year contracts in the overnight index swap market. The markets therefore suggest that rising government bond yields reflect expectations of higher official interest rates in the years ahead – good news because economies are recovering – rather than an increase in credit risk.
Next up from the DMO is an auction of Auction of 4¼ per cent Treasury 2049 on January 13 followed by a sale of Auction of 3¾ per cent Treasury 2019 on the 21st.
Related links:
Consolidating the US, UK gov’t bond sell-off – FT Alphaville
After the decade of debt: A course to chart- FT
Our wall of gilts is casting a long shadow over 2010 - FT