Treasury bond auction fails

Thursday, 26 March 2009 12:00

The UK Treasury failed to attract enough bids for a sale of government gilts yesterday for the first time since 1995.

A warning from the Bank of England's governor, Mervyn King, that the government has overstretched itself and cannot afford another financial bailout appeared to spook investors.

Following the comments, an auction of 40-year government bonds, priced at £1.75 billion, only raised £1.627 billion after failing to attract enough bids.

This left the issue only 93 per cent covered, in contrast to other recent auctions that have been oversubscribed by around two to one.

Liberal Democrat shadow chancellor, Vince Cable, said: "While this failed gilt auction should not be seen as some sort of financial Armageddon, it is clear that the markets are sending a signal to the prime minister and the chancellor to make their minds up over borrowing."

The government needs to raise money through selling bonds to investors around the world to make up the shortfall between taxes and spending. A failure by the government to persuade investors to take on the debt could reflect worries over its ability to pay the money back.

Julian Jessop, analyst for Capital Economics, said timing and the long-term nature of the bonds were the reasons for the lack of interest among investors.

"For a start, ultra-long bonds are always likely to be harder sells than benchmark ten or even 30-year issues, especially when yields are near historic lows to begin with.

"This is doubly so when the Bank of England's purchases under quantitative easing will be limited to the shorter maturities.

"And the timing of Wednesday's auction was particularly unlucky in the wake of the previous day's CPI figures and Bank of England Governor King's comments on the weakness of the fiscal position."

Demand is still strong for the shorter-term gilts, which the Bank of England is buying as part of its quantitative easing scheme, Capital Economics said.

The consultancy expects this demand will continue to drive down yields on these bonds, to around 2.5 per cent, in the coming months.

Harriet Harman, who was standing in for Gordon Brown at prime minister's questions yesterday, said: "As far as the gilts are concerned, the head of the Debt Management Office has said it would be wrong to read anything into the result of one auction.

"He says that the amount of debt we are raising is sustainable."

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