Government debt not “rocketing” yet

Yesterday's gilt sale had the highest level of demand for government bonds in 9 months. The auction is at odds with news that gilt yields were set to "rocket".

City AM report today that:

“A key auction of government bonds was yesterday heavily oversubscribed, in a tentative sign that investors are still keen to buy UK debt despite fears over the country’s credit-worthiness.

“The Debt Management Office (DMO) said it had received bids for 2.68 times the £4bn of five-year gilts on offer, equivalent to the highest level of demand for government bonds in nine months.”

The average yield was 3.08 per cent. As the graph below shows, this is a cheap price in the context of the last 12 years and somewhat at odds with reports in Tuesday’s Evening Standard that gilt yields were set to “rocket” and news that Pimco, the world’s biggest bond fund, was cutting its holdings of US and UK debt.

David Prosser in the Independent, “And yet for all the panic in the wake of the PBR over Britain’s treasured AAA credit rating, Pimco is very much in the minority at putting the chances of a downgrade so high.”

But FT Alphaville today set why the auction may not contain such good news:

“The real test of demand for gilts is now widely expected to come next Wednesday, with the £2.25bn 4.25 per cent 2049 auction. That particular offering has fewer of the supportive traits of this week’s one.”

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