UK government bond auction rocked by political nerves

By Andy Bruce

LONDON, Nov 15 (Reuters) - Nerves among Britain government bond investors forced the country's debt agency to accept low-ball bids for a 20-year bond at auction on Thursday to an extent not seen since March 2009, as a wave of ministerial resignations rocked markets.

The Debt Management Office said in a statement that it sold 2 billion pounds ($2.56 billion) of the 1.75 percent 2037 conventional gilt at auction.

While bids received outstripped the amount on offer by 1.75 times, the makeup of the bids showed the DMO had to accept some unusually low bids to sell the full amount of the bond.

The gap between the average yield accepted in a bid by the DMO and the highest stood at 5.1 basis points -- the biggest since March 2009, at the depths of the financial crisis.

By contrast, the average yield tail for conventional bond auctions over the last 10 years stands at just under 0.6 basis points.

Gilt yields plunged along with sterling on Thursday after Brexit minister Dominic Raab and work and pensions minister Esther McVey resigned in protest at Prime Minister Theresa May's draft deal for leaving the European Union.

"It's not that surprising in the context of volatility in the market, it was a bad auction. The cover was just about acceptable," Societe Generale strategist Jason Simpson said.

"It's not really an environment where (primary dealers) are going to want to take on board a warehouse-load of risk."

Simpson noted a "massive" steepening of the gilt yield curve.

Data from Refinitiv showed the spread between the 10-year and 30-year gilt yields had ballooned by more than 11 basis points as of 1105 GMT, which would have been the biggest widening since February 2009.

As of 1156 GMT it stood almost 8 basis points wider on the day, which if sustained would be its biggest daily widening since May 2015.

A steepening of the yield curve indicates investors are taking away bets for interest rate hikes from the Bank of England in the near-term and may fear an economic slowdown.

As of Thursday, the sterling overnight index average curve was fully pricing in the next Bank of England rate hike for February 2020, compared with December 2019 at the start of this week, Simpson said. ($1 = 0.7808 pounds) (Additional reporting by David Milliken)

2018-11-15 14:01:28

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