Market News

By David Milliken

LONDON (Reuters) -Britain sold a record 14 billion pounds ($18.9 billion) of new 10-year government debt on Tuesday at the highest yield since 2008, after attracting more than 141 billion pounds in orders from investors despite sterling heading for its worst day since June.

The UK Debt Management Office sold the 4.75% October 2035 gilt with a yield of 4.8786%, a premium of 8.25 basis points over the 10-year benchmark gilt that launched with a then-record volume of 13 billion pounds in February.

Shortly before the sale started at 0730 GMT, sterling slumped by more than 1% against the U.S. dollar and 30-year gilt yields hit their highest since 1998, as investors looked warily ahead to the government's autumn budget plans.

Britain has the highest inflation in the Group of Seven advanced economies as well as the highest government borrowing costs - putting pressure on finance minister Rachel Reeves and likely requiring her to raise taxes again later this year.

Tuesday's gilt syndication represented the most issuance at a single event since the DMO began operations in 1998, but also the costliest 10-year borrowing since an auction in July 2008.

Orders were close to the record 142.1 billion pounds received at February's 10-year gilt syndication.

"For the government, this creates a paradox - market confidence in UK debt is robust, but financing that debt is increasingly expensive, constraining budget flexibility and raising the stakes for fiscal discipline ahead of the Autumn Budget," said Lale Akoner, global market analyst at investment platform eToro.

After the DMO published the syndication result, the yield on 10-year gilts rose to its highest since January at 4.825%, up 6 bps on the day but in line with U.S. Treasuries.

Britain has historically issued much longer-dated debt than other countries, due largely to demand from domestic company pension funds.

But changes in the pension landscape mean that demand has mostly gone and a global rise in the cost of 20- and 30-year debt means the DMO has shifted its issuance this year towards short- and medium-dated gilts.

HSBC, J.P. Morgan, Lloyds, Morgan Stanley, NatWest and UBS are acting as joint leads on the transaction for the new gilt.

($1 = 0.7402 pounds)

(Reporting by David Milliken; Editing by William Schomberg and Alex Richardson)