U.K. Government Debt Sale Attracts Bumper Demand -- 2nd Update
April 26 2016 - 10:11AM
Dow Jones News
By Christopher Whittall and Jason Douglas
Bumper demand for a multibillion pound sale of U.K. government
debt issued on Tuesday and a sharp rally in sterling, appeared to
show that investors are more relaxed about Britain's June vote on
its membership of the European Union.
The GBP4.75 billion ($6.9 billion) debt sale attracted GBP21
billion of orders, according to a notice released on Tuesday by
banks underwriting the deal. The pound, meanwhile, rose 1% against
the dollar on the day, reaching its highest level against the
greenback since early February. The currency rallied as recent
opinion polls showed the U.K. leaning toward a vote to stay in the
EU.
Concern that a British vote to leave the EU, the so-called
Brexit, would hit the British economy has pushed the pound down
1.3% against the dollar and around 5% against the euro this
year.
"As the odds of Brexit have fallen, sterling has outperformed,"
said Mike Riddell, a portfolio manager at Allianz Global Investors,
who said the British pound has been the best performing currency in
global markets over the past five days.
Still, the pound has rebounded before and come back down again
as the prospect of a possible Brexit increased.
But trading in government debt and the country's main equity
market has been mainly unaffected by speculation over Brexit. On
Tuesday, bond investors showed on Tuesday they mainly remain
unperturbed about the coming vote, jumping into the sale of
government debt, also known as gilts.
Bond investors have been divided on what they believe will be
the impact of the vote on gilts. Foreign investors sold debt
securities at the start of the year, but that has been offset by
domestic buying.
In Tuesday's sale, the government's financing arm, the U.K. Debt
Management Office, doubled the size of an existing GBP4.75 billion
bond issue that pays an interest rate of 2.5% and matures in 2065,
according to the deal notice. The bonds sold at the lower end of
initial guidance levels provided by underwriting banks, according
to the deal notice, at a yield of 2.29%.
U.K. government bonds have gained with a global rally in
sovereign debt in 2016. Rising prices have pushed the yield on
10-year gilts around 0.3 percentage point lower to 1.65% this year.
Government debt rallied at the start of the year as investors
looked for safety amid an uncertain global outlook.
Still, yields have ticked up from a recent low of 1.32% on April
7, with investors now reassessing their outlook on the global
economy.
Proponents of the U.K. staying in the EU say an exit would badly
damage the U.K.'s economy by hitting its trading relationships with
the rest of the world and making Britain a less attractive place
for foreigners to invest in. Those calling for a Brexit, say that
the U.K. economy will thrive, freed of EU regulation, and that new
trade agreements will be agreed.
The gilt sale comes ahead of a report due Wednesday that is
expected to show the U.K. economy lost momentum in the first
quarter, after growing in 2015 at the second-fastest pace among the
Group of Seven leading economies, after the U.S. A renewed
manufacturing slump as well as uncertainty over the outcome of
June's referendum are both weighing on growth, economists say.
Officials at the Bank of England, led by Gov. Mark Carney, have
warned that the economy could slow further in the months ahead as
doubts about Britain's future in Europe intensify. The BOE's
rate-setting Monetary Policy Committee in April highlighted a range
of potential vulnerabilities to referendum jitters, including
hiring, business investment, real-estate transactions and consumer
spending.
Citigroup Inc., Deutsche Bank AG, HSBC PLC and J.P. Morgan Chase
& Co. are underwriting the deal.
Write to Christopher Whittall at christopher.whittall@wsj.com
and Jason Douglas at jason.douglas@wsj.com
(END) Dow Jones Newswires
April 26, 2016 10:56 ET (14:56 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.