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UK Debt Costs Hit Highest Since 1998 as Issuance Flood Begins - BLOOMBERG
(Bloomberg) -- The UK’s long-term borrowing costs surged to the highest level since 1998 as investors grapple with a flood of bond sales this year.
The yield on 30-year gilts climbed four basis points to 5.22% on Tuesday after a sale of same-maturity securities. That gave mixed signals, with average yields not far off the highest accepted but the lowest oversubscription since 2023, showing angst on supply remains.
The move higher in borrowing costs is ramping up the pressure on Chancellor of the Exchequer Rachel Reeves to keep the market on side ahead of a raft of bond sales. The Labour government’s plans to sell £297 billion of bonds this fiscal year — the second-highest on record — is keeping gilts under pressure, as investors worry about the outlook for the nation’s ballooning debt.
“Following a busy January, the burden of gilt issuance volume is unlikely to ease significantly, if at all, in cash or duration terms, for at least the remainder of the quarter,” Sam Hill, head of market insights at Lloyds Banking Group Plc, wrote in a note.
The UK’s Debt Management Office sold £2.25 billion ($2.8 billion) on 30-year notes on Tuesday paying a yield of 5.198%. The bid-to-cover ratio was 2.75, the lowest since December 2023. Meanwhile, the difference between the average and lowest yield accepted — known as tail — was just 0.3 basis points, indicating solid appetite for the notes.
The DMO will also sell £4.25 billion of new five-year bonds on Wednesday. That adds to a Monday BOE operation to reduce its balance sheet via the sale of securities in the seven- to 20-year bucket — a process known as quantitative tightening.
The prospect of fewer interest-rate cuts from the Bank of England than initially expected has also weighed on the notes. Traders are betting the UK central bank will deliver only two quarter-point reductions this year, compared to bets on more than three at the start of last month.
The market moves show the extent to which the government is treading a fine line, as it tries to keep investors on side and dispel the memory of former Conservative Prime Minister Liz Truss’ disastrous mini-budget of 2022. Reeves already received a warning from bond vigilantes in October when yields surged in response to the prospect of bigger debt auctions.
(Updates with results of the sale from paragraph one.)
