UK sells £4 billion of government debt at highest yield since 2007

Sunday, July 9, 2023

In May, the UK's debt-to-GDP ratio topped 100% for the first time since 1961. EY ITEM club adviser Martin Beck told The Guardian June 21: "Higher inflation combined with higher short- and long-term interest rates will significantly increase the level of debt interest payments".
Image: Madeleine Liu.

The United Kingdom's Debt Management Office (DMO) auctioned off £4 billion in government debt as two-year gilt-edged securities Wednesday with an average annual yield of 5.668%, the highest since June 2007.

In the UK, the DMO issues gilts, called 'bonds' in other countries, as securities to finance the government's spending when it exceeds the revenue generated from taxation.

Despite strong demand, with bids for the gilts totalling over £11 billion, returns were pushed to a fifteen-year high because, media reported, traders believed the Bank of England (BoE) would continue raising interest rates, and because of high inflation devaluing returns.

On June 22, the Bank's Monetary Policy Committee upped its bank rate in the thirteenth consecutive rise from 4.5% to 5% after "significant upside news in recent data that indicates more persistence in the inflation process".

That day, HSBC asset strategist Joseph Little told Reuters the BoE may increase its main interest rate to up to 6% because "[i]nflation pressures show more persistency and more momentum than other Western economies, and that forces the Bank into a hawkish corner". Reuters additionally reported investors believed rates would climb to about 6.25% sometime December before falling.

The effect of higher interest rates is that the same gilts with a maturity of October 2025 sold for an average yield of 4.874% last month and for 3.634% in January. However, NatWest bond specialists told Reuters last week the gilts were "one of the cheapest bonds on the UK fitted curve".

UK inflation held at 8.7% in May, contrary to forecasts, while core inflation, which excludes certain consumables like food and energy, increased to 7.1% from 6.8% in April, a high not seen since 1992. The BoE consequently revised its projection that by the end of 2023 inflation will come down to about 5%, not 4%.

In June 2007, the UK offloaded £2.5 billion worth of five-year gilts with an average yield of 5.790%.

At 08:17 BST (0717 UTC) Thursday, the yield on two-year gilts was 5.429%, while the ten-year gilt at 08:19 was 4.548%.