UK Bond Auction Chills as Budget and US Election Double Whammy Hits Markets

(Original title: Due to the double attack of the budget and the US election, the British government bond auction was cold)

Zhitong Finance APP learned that demand for British bonds fell to the lowest level in nearly a year at Tuesday’s auction, indicating lingering investor concerns about last week’s fiscal expansion budget and the U.S. presidential election.

Bids for the 10-year gilts totaled 2.81 times the planned issuance of 3.75 billion pounds ($4.9 billion), the lowest bid multiple for a bond of that maturity since December. Last month, a similar auction had a bid multiple of 3.25 times.

British bonds were sold off sharply after Chancellor of the Exchequer Rachel Reeves announced plans to increase borrowing and boost investment, raising concerns about inflation and fiscal pressures. Moody’s Ratings called this the most aggressive fiscal easing policy in the UK since the epidemic and said it poses new challenges to public finances.

Mark Nash, head of fixed income alternatives at Jupiter Asset Management, said: “The market appears to be concerned that the budget is not going to work.”

UK bond auction demand falls

Tuesday’s auction was the second since last week’s budget. Last week’s 30-year green bond issue attracted strong demand, while UK bonds also attracted significant funding in September.

But that appears to have changed after the British government announced revised plans to issue 297 billion pounds of government bonds this financial year. The 10-year UK government bond yield jumped more than 20 basis points last week to its highest level in a year.

Giles Gale, a strategist at UBS Group AG, pointed out that the structural shift in the British bond market was caused by pension funds reducing their purchases of long-term British government bonds. Pension funds are the main buyers that have yet to be displaced.

The UK bond sale comes as the outcome of the US presidential election is about to be announced, a key risk event for global markets. Many investors are staying on the sidelines ahead of the election results, which remain difficult to predict.

“Market focus is now on the U.S. election given the closeness of the two candidates and the potential market impact,” said Neil Mehta, portfolio manager at RBC BlueBay Asset Management.