Gilt auction demand lowest in two years in sign of pre-Budget jitters
Gilt market jitters in the run-up to the Budget bled into demand at government bond auctions for the first time on Thursday, as sales of bonds saw interest from investors hit its lowest in at least two years.
Auctions of five- and 30-year gilts issued by the Debt Management Office (DMO) this week attracted the lowest number of orders since at least 2022, in a fresh worry for the Treasury as it puts the finishing touches to its second Budget in November.
Despite long-term government borrowing costs surging to their highest level this century last month, demand for UK debt at auction had been holding up better than many analysts expected. The same week when the yield on 30-year gilts surged to the highest its been since 1998, the largest sale of 10-year government bonds in history attracted record investor interest, which went a long way to allay fears that the gilt market was in the grips of a full-blown crisis.
But the stuttering demand at this week’s sale suggests bond buyer reservations about the UK’s fiscal path are extending into auctions for the first time and will act as a further upward force on the interest the government has to pay on its debt.
Next week will also bring another test of investor appetite, when the DMO issues a further £2bn of debt through nine- and 13-year gilts on Thursday.
Neil Wilson, UK investor strategist at Saxo Markets, said the auctions were evidence of “investor doubts creeping in ahead of the Budget”.
Falling demand piles further scrutiny on Budget
Reservations among bond investors over the UK’s fiscal credibility have become increasingly clear over the past year, during which borrowing costs have climbed to the highest of any G7 economy.
The yield on the UK’s 10-year bond – generally used as the main benchmark for a government’s ability to borrow – has risen over 40 basis points since the Labour government’s last Budget.
“Rising debt interest costs is a symptom of a government increasingly spending more than it generates in tax revenue,” said Dan Appleby, chief investment officer at Blackfinch Asset Management in a note to investors on Thursday.
“Issuing more debt to cover the gap comes at a cost of higher interest costs. It is highly unlikely that we see the radical reforms that are required” at the Budget.
“Until we do, the UK will maintain its spending problem and simply hope that it can grow a its way out of it.”
A string of costly U-turns over the summer have also helped drive the country’s borrowing costs further in recent months. The government was forced to announce several multibillion-pound climb downs from planned cuts to the winter fuel allowance and the welfare bill.
Those moves were compounded by reports that the Office for Budget Responsibility is poised to downgrade its UK productivity forecast – a key metric for the country’s fiscal outlook – when it delivers its next verdict on the economy in the wake of the Budget.