UK Sells 30-Year Bonds at Highest Yield Since 1998, Raising Fiscal Concerns
Britain's Record-Breaking 30-Year Bond Sale and Its Implications
By David Milliken
LONDON, Sept 8 (Reuters) - Britain sold £4.25 billion ($5.75 billion) of 30-year bonds on Tuesday with the highest yield since comparable records began in 1998, as rising global borrowing costs cast a shadow over new finance minister John Healey's plans for his first budget.
Britain has the second-highest government borrowing costs among larger advanced economies after Australia, and last week global concerns about inflation driven by the U.S.-Iran war lifted 30-year gilt yields to their highest since early 1998.
Details of the 30-Year Gilt Sale
Tuesday's 5.375% 2056 gilt was sold via syndication with a yield of 5.8168% — the highest at any gilt auction or syndication since the UK Debt Management Office was established in 1998 and locking in the impact of the recent rise in yields.
Long-dated conventional debt once formed a major part of British issuance. But rising costs and falling demand from pension funds mean it is on course to make up less than 10% of the £246 billion of gilt issuance planned for this financial year.
Strong Investor Demand
STRONG INVESTOR DEMAND FOR RECORD YIELD ON OFFER
Demand for the 30-year benchmark was nevertheless strong on Tuesday. Investors placed more than £85 billion in orders and – as usual at British gilt syndications – the bond was priced at the tight end of initial guidance, with a yield 0.75 basis points above that of the 4.25% 2055 gilt, according to bookrunners on the transaction.
The 2056 gilt's yield announced by the DMO exceeded the previous record of 5.79% set at a DMO auction in May 1998.
Lead bookrunners for the transaction are Bank of America, Goldman Sachs, J.P. Morgan, Santander and UBS.
Market Reactions and Analyst Commentary
"Today's syndication shows demand for gilts at these yields remains in good health," said Matthew Amis, investment director at Aberdeen Investments. "A poorly received gilt syndication would have put further pressure on gilt yields and in turn government finances."
Before the sale, strategists at RBC had said some investors might be wary of buying into long-dated debt due to last week's global drops in fixed income prices, "which continues to reinforce the risk of trying to catch a falling knife here".
However, they said UK-specific factors were more positive and had contributed to a narrowing of 10-year gilts' yield premium over German debt.
Government Response and Fiscal Outlook
"UK domestic narratives ... have all been dovish: softer UK economic data, dovish BoE speak and recent comments from UK PM Andy Burnham and UK Chancellor of the Exchequer John Healey regarding being fiscally responsible," RBC said.
Healey sought to strike a more positive tone on growth in his first major speech on Monday, but stressed the importance of fiscal discipline and spending control ahead of his October 28 budget.
Fiscal Challenges Ahead
Healey's predecessor, Rachel Reeves, had a modest £24 billion of leeway to hit medium-term goals for a balanced current budget by 2029/30. But those forecasts were finalised before the U.S. and Israel launched attacks on Iran, which most economists think will worsen the public finances.
Even then, the Office for Budget Responsibility forecast debt interest costs would reach £109 billion this year or 8.4% of public spending.
Additional Information
($1 = 0.7390 pounds)
(Reporting by David Milliken; editing by Sarah Young, William James and Hugh Lawson)