Wednesday July 1, 06:15 PM
Gilts slump after BoE buyback upset
By David Milliken
LONDON, July 1 (Reuters) - Gilt prices slumped on Wednesday after markets reacted badly to the Bank of England's 3 billion pound ($4.93 billion) reverse auction, where it allocated more than three quarters of its funds to just one gilt.
The September gilt future settled 71 ticks down on the day at 117.37 after hitting a session low of 117.16, and yields on benchmark gilts rose by as much as 15 basis points in the case of the 7-year gilt as prices tumbled.
The BoE's twice-weekly purchases of medium- and long-dated gilts have been a major boost for the British government debt market since they started in March.
But more recently gilts strategists have worried the central bank may end the scheme once it has completed the 125 billion pounds of purchases it plans by the end of the month, especially after it struck two gilts off its purchase list last week.
At this week's medium-dated auction, the BoE received offers totalling 9.584 billion pounds, equivalent to a cover ratio of 3.19 and well above last week's ratio of 2.64, when investors submitted offers worth 7.927 billion pounds.
Moreover, there was a mismatch between the volumes of gilts offered to the BoE and those it chose to buy.
The central bank bought none of the benchmark March 2019 gilt, despite receiving almost 1 billion pounds in offers. Instead it allocated more than three quarters of its funds to the March 2018 gilt, leaving little for the other five gilts in its basket.
'You have one billion offered on the 10-year and the BoE takes nothing, so it's a valid assumption to make that the market has been caught out,' said Matteo Regesta, fixed income strategist at BNP Paribas (Paris: FR0000131104 - news) , adding that it was hard to forecast how much investors would offer and what the BoE would buy.
This view was shared by a gilts trader.
'The buyback didn't go too well and people were left with stocks that they thought would be concentrated on in the buyback but then weren't,' he said.
Nonetheless, uncertainty around the BoE's buyback plans has done little to dent overall market appetite for British government debt at a time when the country is issuing a record volume of gilts to fund spending through the recession.
Earlier in the session the Debt Management Office received very strong demand at its biggest-ever gilt auction, when it sold 5.25 billion pounds of March 2014 gilts -- with demand partly supported by investors' hope that the BoE may in future buy the relatively cheap issue once it exhausts the supply of other gilts.
Economic data early in the session showing an easing in Britain's recession had little market impact and nor did a raft of mixed U.S. data later in the day .
On Thursday the DMO will offer 2.5 billion pounds of 4.25 percent conventional gilts due 2039, and there are also public appearances from BoE policymakers Tim Besley and David Miles.
Sept gilt future 117.37 (-71 ticks)
10-year gilt yield 3.77 pct (+9 bps)
Sept short sterling 98.90 (+2 ticks)
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(Editing by Toby Chopra) ($1=.6083 Pound) Keywords: MARKETS BRITAIN GILTS
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