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Capital markets round up: King’s careless talk costs DMO gilt auction

Just days after the UK Debt Management Office stated that it would use syndication on a quarterly basis to distribute bonds, a 40-year gilt auction failed. Only £1.627 billion of bids were attracted to the £1.75 billion sale of the 2049 bond. The failure was attributed to a sudden turnaround in investor sentiment for gilts and a function of the distortion caused by the Bank of England’s quantitative easing. The last failed auction took place in 2002.

Gilt traders said that the ambiguous commitment that Bank of England governor Mervyn King gave to quantitative easing took the wind out of the market’s sails. Additionally, the Bank of England is only buying bonds from the five-year to 25-year maturity range – leaving anything less than five-year and longer than 25-year maturities relatively orphaned. A five-year gilt auction earlier in the week also struggled.

The Bank of England will be disappointed to see 10-year bond yields, for instance, give up around half of the 60 basis points fall that came following its announcement on March 4 on quantitative easing.

Traders say that unless the Bank is prepared to very publicly back the easing policy and support it by accelerating bond purchases, yields could continue to rise.

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