LONDON – Britain pulled the strongest investor demand since 2005 for its government bonds on Tuesday, when it began a record period of debt issuance to fund higher spending on measures to combat the corona virus.
Britain holds two bond auctions a day for the first time, and aims to sell 45 billion pounds ($ 55.6 billion) of government bonds this month – far surpassing the previous record of 28 billion pounds set in July 2009 during the financial crisis.
Investors briefly became uneasy on the scale of potential lending last month as panic about the impact of COVID-19 swept global markets, and UK borrowing costs have been looking on course for the biggest increase since the 1998 emerging market debt crisis.
But the gold market quickly regained its composure after the Bank of England said it would buy 200 billion pounds of assets – mostly gilts – to support the economy through a quantitative easing program.
The two gold auctions on Tuesday saw investors bid more than three times the volume of gilts offered, in contrast to normal offers which saw auctions around twice the excess demand.
Sales of 1.25 billion pounds from the 40-year gold benchmark
The launch of the new 2023 gold
In both auctions, successful bids clustered in a narrow range, indicating more stable market conditions.
Gold prices were little changed on the whole day, rising slightly after the second auction and outperforming US and German bonds, which started the day lower.
On Wednesday the UK Debt Management Office plans to sell 4.75 billion pounds of gilts further in nominal terms, divided between 5 years and 10 gold years.
The BoE, for its part, will buy 13.5 billion pounds of gilts this week, although it’s not the same as the one sold by the DMO.
The new BoE Governor Andrew Bailey has stressed that the BoE is not involved in ‘monetary finance’ – an irreversible commitment to funding public loans – and that its purchases are aimed at keeping inflation on target, and ultimately reversible.
However, he left the door open to buy gilts directly from the DMO if market conditions deteriorated and the BoE needed to intervene to ensure the financial system was functioning properly.
Last month the DMO said it would issue at least 156 billion pounds of gilts during 2020/21 to fund government loans and refinance existing debt, but added that there might be an upward revision when updating these estimates on April 23.
Citi estimates that gross gold issuance could reach a record 285 billion pounds in the current financial year.
In addition to the shortfall in tax revenue from the economic closure that was put in place to slow the spread of COVID-19, the United Kingdom has guaranteed large amounts of wages for many workers.
These costs and other announced measures are likely to exceed 60 billion pounds even with short lockouts and limited take-up by businesses.
(Reporting by David Milliken, editing by William Schomberg and Andy Bruce)
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