U.K. Sells 7 Billion Pounds of Gilts, Exceeding Planned Amount

Britain sold 7 billion pounds ($11.5 billion) of 25-year gilts, more than the amount planned, offering investors a yield almost as high as longer-maturity debt.

The 4.50 percent 2034 gilts, the first sold through underwriters in almost four years, yielded 4.646 percent, or 11 basis points more than the bond maturing in 2032, after attracting over 15 billion pounds of bids, according to bankers managing the deal. That compares with a yield of 4.659 percent on the gilt due 2036 as of 4 p.m. in London.

“The bond is very cheap compared to its nearby securities,” said John Stopford, who oversees about $12 billion as head of fixed income at Investec Asset Management Ltd. in London. “It’s not such a surprise that it went really well. You should not judge the market or its sentiment on just one sale. But overall, we are less negative about this market.”

Britain plans to sell a record 220 billion pounds of debt in the fiscal year ending March 2010 as Prime Minister Gordon Brown’s government seeks to shore up the banking industry and revive an economy in its deepest recession in at least 30 years. Standard & Poor’s lowered the outlook on the U.K.’s AAA credit rating last month, citing the country’s rising debt burden.

The yield on the bonds sold today was cut from the earlier range of 12 basis points to 15 basis points bankers initially indicated because of the increased demand, sale managers said.

‘Healthy Success’

Investors bid for almost 15.3 billion pounds of the bonds, the bankers said. The Debt Management Office estimated yesterday it would raise between 3 billion pounds and 5 billion pounds. Ninety-four percent of the securities were bought by domestic investors, the debt office said.

“The sale seems to have been a healthy success,” said Philip Laing, director for government bonds in Edinburgh at Standard Life Investments, which bought some of the securities. “The bond was priced cheaply on the gilt curve. Going forward, the underlying question remains: what price do you put on supply? This is the same for all bond markets.”

The U.K. economy is likely to contract 4.1 percent this year and the government should reduce borrowing and keep a lid on spending, the International Monetary Fund said May 20 in its annual health check on the British economy. Chancellor of the Exchequer Alistair Darling forecast the economy will shrink by as much as 3.5 percent in his budget on April 22.

Barclays Plc, Goldman Sachs Group Inc., HSBC Holdings Plc and Royal Bank of Scotland Group Plc arranged today’s sale, earning a combined fee of 14 million pounds, according to two bankers. The last and only other occasion that the U.K. sold bonds through banks was in 2005, when it offered 50-year inflation-protected securities for the first time.

Asset-Purchase Plan

Using financial institutions to sell debt rather than issuing securities at auctions reduces the risk of failure because underwriters offer the securities directly to investors such as pension funds and insurance companies after determining demand and prices. Britain couldn’t find enough buyers at a sale of bonds in March, the first so-called uncovered transaction since 2002, fueling concern the nation’s rising debt load was overwhelming demand.

The sale was the first of as many as eight so-called syndicated offerings by the U.K. this fiscal year, which may raise as much as 25 billion pounds.

Speculation that the Bank of England will extend its quantitative-easing program, in which it’s buying assets with newly printed money, may have bolstered demand for the bonds, according to Stopford.

Central bank policy makers voted in March to buy government bonds with maturities of between five and 25 years in an effort to drive down borrowing costs. The bank said May 7 it may spend 125 billion pounds on the program by August. The government authorized as much as 150 billion pounds of purchases.

“I guess the market is running on an assumption that the quantitative-easing program will continue” and the bonds sold today will be eligible for purchases, Stopford said.