(Bloomberg) -- The UK pulled in more than £110 billion ($144 billion) of orders for a new bond sale Tuesday, in a sign investor appetite for government debt remains strong after Labour won a landslide election in July.
The country’s Debt Management Office raised £8 billion from a gilt maturing in January 2040 with a 4.375% coupon. The security, the first new bond sold via banks since the election, priced at 4 basis points over comparable notes. The orderbook matched a record set in June and is the biggest-ever demand compared to the size of the sale, according to data compiled by Bloomberg.
The latest deal looks like a sign of trust in a government under pressure to fill a gap in the budget, two years after a blowout in yields on fears about the country’s deficit under then-prime minister Liz Truss. The new premier, Labour’s Keir Starmer, has pledged to reestablish fiscal discipline, even as he rules out broad-based tax increases and spending cuts.
The bumper bond orders also reflect demand from investors to grab still-elevated yields ahead of more interest-rate cuts from the Bank of England, following a reduction last month. The UK enjoyed the best growth among the Group of Seven nations in the first half of the year, further lifting optimism about the country’s near-term outlook.
“The recent successful gilt sale is primarily fueled by long-term investors seeking to lock in yields above historical averages,” said Althea Spinozzi, head of fixed-income strategy at Saxo Bank. She says long-maturity debt is still susceptible to even higher yields if inflation persists, preferring instead shorter tenors such as two-year notes.
The new Chancellor of the Exchequer Rachel Reeves has said there will be serious consequences if “we don’t get to grips with the public finances overall,” having highlighted a £22 billion black hole in the books. She needs to produce a plan when she unveils the government’s budget for the coming year next month.
Government borrowing has come in higher than expected in the first four months of the current fiscal year despite a stronger economy. That means Reeves may need to raise taxes or cut spending to meet fiscal rules that she’s kept from the previous Tory government, to have debt falling as a share of GDP in five years. While Reeves has indicated it will be a tightly controlled budget, she recently said that she believes it is “reasonable for the government to borrow to invest.”
However, any further sales of gilts will add to extra supply in the market from the BOE’s quantitative tightening program, which is reducing its balance sheet of government bonds built up since the financial crisis. The central bank is cutting its stock of gilts by £100 billion in the 12 months from October 2023 — including sales of maturing debt. It will decide on the pace of QT over the next year at its meeting later this month.
The new government has both struggled with and embraced the repercussions of the bond-market meltdown sparked by Truss’s disastrous mini-budget two years ago.
On the one hand, the government has referenced that selloff to justify decisions such as ending winter fuel subsidies for pensioners and laying the ground for tax increases in the October budget. But that history has also prompted handwringing about whether the party’s honeymoon with investors is already over.
The UK’s 15-year bonds extended gains on Tuesday after US manufacturing shrank, sending yields down as much as nine basis points to 4.23%. Bookrunners on the new deal were Bank of America Corp., Goldman Sachs Group Inc., HSBC Holdings Plc, Lloyds Banking Group Plc and Banco Santander SA.
--With assistance from Hannah Benjamin-Cook, Greg Ritchie and Tom Rees.
(Updates with new quote, adds context.)
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