UK gilt auction fails to roll back yield spike

  • January 15, 2025

UK gilt auction fails to roll back yield spike

UK gilt auction fails to roll back yield spike
Gilts are an important part of the UK’s financial system.

A closely watched sale of UK government debt failed to roll back the alarming rise in yields after the £4bn auction did not drum up significant interest for gilts.

The Debt Management Office (DMO) reported that the 2034 gilts were sold at a yield of 4.808 per cent, compared with 4.332 per cent in the last auction on 11 December, making it the highest yield in a gilt sale since 2008.

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The bid-to-cover ratio of 2.8 was lower than the 2.87 seen at the last auction, the weakest level of demand since 2023. Y esterday’s £1bn sale of 30-year index-linked gilts was also three times oversubscribed.

Gilt yields have jumped more than seven per cent since the start of January as fears have mounted over the sustainability of UK government debt.

Today, yields fell only slightly after better-than-expected inflation numbers raised hopes that interest rate cuts may come sooner than had been expected.

New figures from the Office for National Statistics (ONS) put the headline rate at 2.5 per cent in December, down from 2.6 per cent the month before and 0.1 per cent below economists’ expectations.

Services inflation, seen as a better measure of domestic price inflation, sunk to 4.4 per cent. This was down from five per cent in November and below the 4.8 per cent expected by analysts.

However, 10-year gilt yields have fallen by just 0.04 per cent today, compared to a more than 27 per cent rise over the last year.

“Gilt yields, especially at the front end of the curve, should start decoupling from the recent US-driven sell-off,” said Tomasz Wieladek, chief European economist at T Rowe Price.

“The long end of the gilt curve tends to be driven by international factors. However, the two-year gilt is typically anchored by monetary policy. Today’s data show a very different economic path in the UK than in the US.

“Gilt yields, especially at the short end of the curve, should start reflecting this. They will likely be less responsive to further US sell-offs going forward.”