UK Gilt Auction Fails to Cover

123jump.com Staff
25 Mar, 2009
New York City

The UK government failed to attract buyers to finish its auction for treasury securities known as gilts. Investors shied away from the long dated maturities when the inflation is on the rise, pound is weak and government is planning to huge amount of debt.

[R]2:30PM New York, 6:30PM London – UK gilt offering fails to cover for the first time in seven years.[/R]

The UK government failed to attract buyers to finish its auction for treasury securities known as gilts. UK Debt Management Office attracted bids for only 1.63 billion pounds for a sale of 1.75 billion pounds with 40 years of maturity.

The monthly debt sale came when the UK government is struggling with falling government revenues and investors’ confidence is low around the world.

Investors shied away from the long dated maturities when the inflation is on the rise, pound is weak and government is planning to huge amount of debt. UK government plans to sell 146 billion pounds of debt in the current fiscal year and 148 billion pounds in fiscal 2010.

The yield on 10-year government securities gilt rose 4 basis points to 3.37% according to the data reported on Bloomberg News. The pound declined to $1.458 and fell to 92.33 pence against euro.

UK is expected to have 8% budget deficit in the current fiscal year and is expected to be as high as 11% in fiscal 2010.

The debt auction failed to cover for the first time since 2002 when inflation protected bond auction failed to generate the sufficient demand. The gilt auction not linked to inflation also failed to garner enough attention in 1995.

If the current weak demand continues, the UK government may have to trim its gilt offering or increase interest it pays on bonds which only increases the government’s borrowing costs.

The UK and U.S. central banks have decided to authorize the respective finance ministries to print more currencies. While the current interest rates are low and measured inflation is hovering below the central bank’s target, the inflation will be on the rise in few years.

Fed Chairman and Bernanke and Bank of England Governor have suggested that central banks will retrench as soon as the inflation picks up, but the central banks rarely do so.