Strong demand for government debt in first post-referendum bond auction

 
Jake Cordell
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Cheaper government debt is quite handy for the Treasury given George Osborne just abandoned his target to balance the books
Cheaper government debt is quite handy for the Treasury given George Osborne just abandoned his target to balance the books (Source: Getty)

The UK government dipped its toe back into the waters of the global debt markets today, selling £2.5bn of bonds at record low interest rates in the first auction since the referendum.

The debt, which came with a five-year maturity, will yield just 0.38 per cent in a sign investors are still keen to lend to the UK government despite its recent credit rating downgrade.

When the government last issued a five year bond, at the beginning of June, it was sold with average yield of 0.86 per cent - more than double today's rate.

Today's auction is the first since the referendum hiatus kicked in on 9 June in line with the Debt Management Office's strategy of making sure they only offer government debt at times when the market is most liquid.

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The bid-to-cover ratio, which calculates how many pounds of debt were bid for for every £1 on offer, came it at 1.8 - up from 1.6 in the early June auction - in a sign of healthy demand for government debt.

UK government debt is currently trading with record low yields, in a fall Mark Carney, governor of the Bank of England described as "remarkable". The yield on 10-year debt has fallen to 0.8 per cent, down from two per cent this time last year, while short-term debt edges closer and closer towards negative territory, with two-year bonds yielding just 0.14 per cent according to Bloomberg.

Asset managers Royal London said the current bond yields indicated the market was "fully priced for a deep recession [and] suggest that the 'flight to safety' could reach new heights."

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