Demand for UK bonds surges as government funds coronavirus spree
Investor demand for UK government bonds was its highest for three years today as Britain sold £3.25bn worth of debt to help fund its unprecedented coronavirus support programmes.
Buyers bid 3.05 times the £3.25bn available of the 0.125 per cent return three-year Gilt (UK government bond). It sold at an average yield of 0.204 per cent, the UK’s Debt Management Office said today.
The sale was one of two that will occur today and one of many set for this month. The UK government plans to borrow £45bn from investors this month by selling them bonds, which are effectively IOUs that bear interest.
High investor demand for the bonds shows that the government should have little problem funding its unprecedented interventions in the economy amid the coronavirus pandemic.
Demand has been supported by the Bank of England’s pledge to buy £200bn more bonds as part of its quantitative easing programme.
“In the current environment investors continue to want safe haven assets, and fixed income represents just that,” said Commerzbank economist Peter Dixon.
“In the near-term I would expect this to persist but in the longer-term we should not expect such favourable conditions to last, so auction coverage ratios will not be quite so good.”
The government will spend at least £60bn through various programmes and will back up more than £300bn of lending.
Perhaps the most radical scheme is a pledge to pay 80 per cent of the wages of people who would otherwise be laid off during the downturn.
The sharp economic slowdown, which economists say could be the worst since World War II, will also add to borrowing as tax receipts plunge.
Isabel Stockton, economist at the Institute for Fiscal Studies think tank, said just over a week ago that borrowing could exceed £175bn this year.
“This would be more than triple the amount forecast in the Budget just two weeks ago,” she said.
Stockton said about 40 per cent of that increase would result from new fiscal measures. “The rest from the economic downturn depressing revenues and adding to government spending.”
The market yield, which moves inversely to price, on three-year Gilts rose marginally to 0.124 per cent today. The 10-year yield rose two basis points (0.02 percentage points) to 0.35 per cent.
Yields rose and prices fell as investors returned to equities following signs the virus is slowing in Europe. The FTSE 100 was three per cent higher at midday at 5,749 points.