Demand for UK gilts is still resilient

BOND markets breathed a sigh of relief yesterday after a key auction of treasury gilts passed off without a hitch despite days of political turmoil.

The auction of £2.25bn of 15-year bonds was wrapped up hours ahead of Gordon Brown’s resignation and the announcement of a formal Conservative-Liberal Democrat coalition.

Even so, it was oversubscribed by 2.47 times, demonstrating resilient appetite for UK government debt among investors in the midst of a testing period for the markets.

The average yield paid out on the bond by the government is 4.47 per cent, less than the yields seen on similar auctions last year – a positive sign that investors are demanding less of a premium to hold UK debt.

Concerns had been rife in the run-up to the auction over the uncertain outcome of horse-trading between the Liberal Democrats and their Tory and Labour counterparts over a political deal.

Jittery investors were expected to punish the UK bond market in the absence of any concrete progress yesterday morning, driven particularly by the key issue of how to cut the yawning fiscal deficit.

Equity and currency markets also firmed in later trading yesterday as speculation mounted ahead of the political announcements.

Sterling rose against the dollar and the euro as days of political uncertainty came to a close – a marked improvement from last week, when the pound fell to a 13-month low against the dollar following the results of the election.

The FTSE 100 recovered to close the day 53.21 points, or nearly one per cent, down, after having dipped well over 100 points during the day.