UK sees record demand in sale of 50-year bond

Britain’s launch of a new 50-year government bond drew record demand, its debt agency said yesterday, prompting it to slightly increase its syndication programme for long-dated debt.

The UK Debt Management Office said it sold £4.75bn (€6.47bn) of the new 2.5% bond maturing in July 2065, via a syndication which drew orders worth £21.9bn.

That was well above a previous record order book of £16.5bn at a syndication of a 30-year bond in June 2014.

The combination of the coupon and long maturity added up to a record amount of duration, a measure of exposure to interest rate risk, taken on by buyers at a British bond sale.

Some analysts said the cheapening of long-dated British gilts in recent weeks could have contributed to the strong demand, with 30-year gilts broadly under performing their US and German counterparts since September.

Ultra-long dated bonds also tend to benefit from demand from pension funds which have to match assets to their long-dated liabilities, analysts say. UK investors accounted for around 95% of the allocation, the debt agency said.

“International capital markets have clearly been volatile but, notwithstanding this, our market has continued to absorb our syndication programme smoothly and efficiently,” Robert Stheeman, the DMO’s chief executive, said.

“The new bond will be the longest duration bond in our conventional gilt portfolio, giving our core investors greater flexibility for liability matching purposes.”

In the secondary market, 30-year gilt yields were little changed on the day at 2.61% after touching a one-month high of 2.627% earlier in the day, but gilts outperformed their long-dated German and US counterparts.

The market overall was down, with 10-year gilt yields rising by 4 basis points to 1.87% as prices fell, but German bund prices dropped more sharply with the yield spread narrowing by 3 basis points on the day to 1.23%.

“Record demand for the new 2065 gilt auction boosted the longer-end, prompting a modest narrowing of the spread between 10-year gilts and 30-year gilts,” Nick Stamenkovic, strategist at RIA Capital Markets said.

“Pension funds maintain strong demand for duration as they match longer-dated assets and liabilities.”

The bond was priced at 98.403 pounds, equivalent to a yield of 2.557%, or 1.5 basis points above the yield on the 2068 gilt against which it was priced.

“The demand is pretty strong. We were sort of expecting that because the sector had cheapened quite a lot and there are plenty of reasons why one should be involved at the long end of the curve,” said Vatsala Datta, UK rate strategist at RBC.


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