UK asset managers pile into record gilt auction
Asset managers have piled into a landmark UK gilt auction after the Middle East war forced the government to fork out the highest interest rate on its 10-year bond since the global financial crash.
Morning Wire understands that Aberdeen and Schroders bought up some of the record £15bn of 10-year securities issued by the Debt Management Office on Tuesday, as investors looked to capitalise on the bumper 4.9 per cent yield on offer.
The interest rate is the highest the government has paid on freshly issued 10-year gilts since 2008, when the global financial crisis plunged interest rates to near-zero historic lows as central banks battled to revive their shell-shocked economies.
A succession of recent macroeconomic and geopolitical shocks have combined with growing investor concerns over the UK’s stubbornly high deficits to carry the cost of government borrowing to multi-decade highs.
The yield on the 10-year gilt has climbed more than 4.5 per cent since the Britain emerged from the pandemic, as investors priced in the return of persistently higher inflation and interest rates and the ballooning sovereign debt pile.
The onset of the war in the Middle East has stoked further pressure on the price of UK bonds, which move inversely to their yield. Last month, the benchmark interest rate the government pays on its 10-year gilts – the main indicator of Britain’s capacity to borrow – shot past five per cent for the first time since the 2008 crash.
Gilts badly hit by Iran war
The spectre of a ceasefire has calmed investors since then, but UK bonds remain among the worst affected by the ongoing conflict. 10-year gilt yields are approximately 60 basis points – or -0.6 per cent – higher than the 4.2 per cent yield at which they were trading before the onset of tensions.
People familiar with Aberdeen and Schroders’ decision-making confirmed the two investment juggernauts had participated in the auction, looking to lock in a decade of near-five per cent annual returns.
“Today’s strong gilt syndication shows continued demand from investors despite the broader market volatility,” said Nathan Hamilton, a rates management investment analyst at Aberdeen. “Weakness in gilts over recent weeks makes these levels attractive, especially when you consider the macro outlook for the UK. We expect further demand for UK yields.”
Government bond yields have risen across the curve since the pan-regional conflict erupted in February, meaning the interest rate on short and long-dated gilts have climbed simultaneously. Movements were sharpest among bonds set to mature on a shorter time horizon, which track centrally set interest rates more closely.
Thomas Pugh, chief economist at RSM, estimates that the jump gilt yields triggered by the war will have already wiped out as much as half of the £25bn fiscal headroom set by the Chancellor.
James Ringer, fund manager of global fixed income at Schroders said: “We remain long gilts. It was the largest syndication book on record, saw good participation from overseas investors and performed well out of pricing. All indicative of improving demand.”