UK’s latest debt sale may be another blockbuster

Bloomberg

Demand for government bonds is showing no signs of letup, with Ireland securing record investor demand despite a host of countries, including the UK, selling debt.
Ireland racked up more than 50 billion euros for its sale of 10-year debt, trumping the 33 billion euros secured in April. The UK meanwhile is selling 30-year bonds via banks against a back drop of a Bank of England (BOE) interest rate decision next week and the possibility that trade talks will not meet their month-end deadline to get extended beyond the end of the year. Spain and Greece are also selling debt via syndication.
The UK’s sale of 30-year bonds notched up over 60 billion pounds of offers, with investors keen on locking in appealing rates, after a near 20-basis-point rise for the yield on these gilts this month. The BOE could boost its quantitative-easing program, spurring yields to fall back.
“Recent long-end gilt syndications have been very well subscribed,” said Peter McCallum, a rates strategist at Mizuho International Plc, adding he expected this deal to go well. “Investors are also searching for yield now that markets have normalised somewhat, and this makes a long-end syndication very attractive.”
The sale, given price guidance of 0.5 basis points over comparable bonds, is the latest by the UK as it ramps up borrowing to fund its response to a recession caused by the coronavirus. A similar syndicated offering in May for 40-year debt saw demand outstrip supply seven times over, while Italian and French sales have drawn record bidding.
Spain and Greece are also selling bonds via banks from Tuesday, knowing that the European Central Bank is providing a backstop in the market.
Syndications have become an increasingly popular way to issue government bonds following the pandemic, because larger-than-usual amounts can be raised. Banks involved in the deal agree to underwrite the offering in return for fees, avoiding the embarrassing possibility of failing to find sufficient demand.
The UK’s Debt Management Office set a coupon of 0.625% on the bonds that mature in October 2050. Peripheral bond yield spreads, a gauge of risk, widened amid the debt sales.
“The issuance bonanza is leaving traces in spreads,” wrote Commerzbank AG strategists Christoph Rieger and
Cem Keltek. “Several periphery issuers decided at once to utilise the conducive post-ECB environment.”
Yields have been rising as investors move away from haven assets given lockdowns are easing. That has also led money markets to take bets off the table on the BOE cutting interest rates below zero in the next year.
The central bank is instead expected to top up its asset-purchase program by 100 billion pounds ($127 billion) next week, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.