The UK is set to get an indication of investor appetite for gilts, with its first bond sale since turmoil gripped the market last week.
The Debt Management Office is auctioning £1 billion ($1.2 billion) of 30-year inflation-linked bonds at 10 a.m. in London. It remains to be seen if it can repeat its showing in November when the same inflation-linked note sold through banks received over £65 billion of orders.
UK assets have been hit hardest among developed economies in the recent global selloff amid mounting concern about government finances and sticky inflation. That sent yields to the highest in decades and took the pound to the weakest level in over a year.
A week ago, an offering of regular 30-year bonds was the least oversubscribed since 2023 — despite offering the highest yields in more than a quarter century. That highlighted the scale of the Labour government’s task as it seeks to borrow near-record sums this fiscal year and make good on its manifesto pledges against a darkening market mood.
Tuesday’s sale could also be hampered if traders hold off buying until they’ve seen the latest inflation numbers from the UK and the US due on Wednesday, said to Megum Muhic, a strategist at RBC.
“I doubt anyone will be looking to add new outright longs ahead of the data,” he said.
The yield on 30-year inflation-linked debt was poised to snap a six-day advance on Tuesday, falling four basis points to 2.11% at 8:05 a.m. in London.
There won’t be any let-up in the sales. Tuesday’s offering will be followed by a £4 billion auction of 10-year notes on Wednesday. Next week will see a sale of three-year debt as well as an offering through banks of bonds maturing in 2040.
And the final week of January will conclude with sales of 10-year inflation-linked securities, green debt and a Bank of England operation to sell long-maturity bonds from its holdings purchased during the era of quantitative easing.
Budget Scrutiny
The rise in borrowing costs is eating into the little fiscal wiggle room Chancellor Rachel Reeves’ has left. Scrutiny is now on how she will rebuild her budget headroom, with the options being to raise taxes, cut government spending, trim welfare, rein in her investment plans or let borrowing rise.
Reeves will speak to lawmakers later Tuesday for the first time since last week’s turmoil.
The yield on Tuesday’s inflation-linked note — which strips out the inflation component — is up more than half a percentage point since the last sale. The yield closed above 2% for the first time in more than two decades last week.
Still, RBC’s Muhic said the sale could find support because it’s investors’ last opportunity to buy this particular security. What’s more, the bond looks cheap relative to its neighbors ahead of the sale, he said.
