UK 10-year gilt auction sees strong demand, high yield

A person walks past the Bank of England in the City of London financial in London, Britain, October 3, 2022. REUTERS/Henry Nicholls/File Photo

LONDON, Oct 5 (Reuters) - Britain received solid demand at an auction for 3 billion pounds ($3.43 billion) of 10-year government bonds on Wednesday, after patchy investor appetite for a 40-year issue the day before, but it paid the highest interest rate at any auction since 2011.

Investors bid for 2.50 times the sum available of the 1% 2032 gilt , and will receive an average yield of 4.123%. This was the highest average yield since an auction of 30-year gilts in 2011, though less than the yield at a syndicated sale of a 30-year green bond last week when market turmoil was greatest.

When the same 2032 gilt was last sold at auction less than a month ago, the yield was more than a full percentage point lower at 3.088%, highlighting the sharp increase in British government borrowing costs.

UK Debt Management Office (DMO) chief executive Robert Stheeman told Reuters on Monday that sovereign bonds were undergoing a "major repricing", after many gilts recorded their sharpest calendar-month price fall in decades last month.

Bond markets baulked at the extra borrowing implied by new finance minister Kwasi Kwarteng's first fiscal statement on Sept. 23, and sharply revised up expectations for Bank of England interest rates, reinforcing an existing upward trend.

The DMO has said it will issue an extra 62 billion pounds of gilts this financial year to accommodate Kwarteng's plans, and last week the BoE intervened in the gilt market to stem a sell-off in long-dated gilts that threatened some pension funds.

Wednesday's bid-to-cover ratio was stronger than the 1.97 at Tuesday's auction for a 40-year benchmark gilt and the yield tail was far shorter at 0.3 basis points (bps) rather than 4.0 bps, indicating that low-priced bids were unsuccessful.

Gilt futures rallied after the sale, jumping by around 20 ticks. Ten-year benchmark gilt prices were weaker on the day, however, with yields rising by 12 bps on the day to 3.99%, roughly in line with U.S. Treasuries .

($1 = 0.8759 pounds)

Reporting by David Milliken, Editing by Paul Sandle

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