UK bonds sag after soft demand at first BoE sale of medium-dated gilts

By David Milliken

LONDON (Reuters) -The Bank of England received soft demand on Monday at its first auction of 750 million pounds ($859 million) of medium-dated government bonds from its 837 billion pound quantitative easing stockpile, pushing 10-year borrowing costs to an 11-day high.

Investors bid for 1.012 billion pounds of the gilts with a maturity of 7 to 20 years, less than half amount the central bank received at its first QE unwind auction on Nov. 1, when it sold 750 million pounds of short-dated British government bonds.

Monday’s bid-to-cover ratio of 1.35 was also low compared with those seen at standard gilt auctions held by the UK Debt Management Office, which typically have bid-to-cover ratios of higher than 2.0 despite larger volumes of gilts.

Benchmark 10-year government bond yields rose after the BoE auction to their highest since Oct. 27 at 3.626%, up almost 8 basis points on the day.

Antoine Bouvet, rates strategist at ING, said the BoE’s auction result was “not brilliant” and perhaps reflected a glut of gilt issuance due in the coming days.

The Debt Management Office is on course to issue an unusually high 11 billion pounds of debt this week, including around 5 billion pounds of a new 15-year government bond via syndication on Tuesday.

The BoE is the world’s first major central bank to sell government bonds bought for quantitative easing purchases, and the sales come just as bond prices have been falling sharply as Western central banks jack up rates to tame inflation.

The BoE has said reversing QE is not intended to play a major part itself in controlling inflation, but is needed to avoid financial market distortions and to give the central bank scope to intervene again in future if needed.

At its peak, the BoE owned around half of Britain’s conventional government bonds.

The BoE aims to hold six more gilt auctions this year, taking sales to 6 billion pounds.

The central bank wants to reduce its total gilt holdings by 80 billion pounds over 12 months, through a mix of outright sales and continuing its policy – in place since February – of not reinvesting the proceeds of gilts which mature.

The BoE had intended to begin sales in late September. But the start was delayed by mourning for Queen Elizabeth and then former prime minister Liz Truss’s mini-budget, after which forced the BoE to buy 19 billion pounds of long-dated and index-linked gilts to halt a fire sale by pension funds.

Andrew Hauser, the BoE’s executive director for markets, said on Friday that the central bank wanted to begin selling these gilts in a “timely” fashion, possibly before the end of this year.

($1 = 0.8731 pounds)

(Reporting by David Milliken, Editing by Kylie MacLellan and Andy Bruce)