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Look what just hit the fan in England...
A foreshadowing of the fate of US Treasuries?
Time to duck and clear out of the splatter zone...
Time to duck and clear out of the splatter zone...
MARCH 25, 2009, 7:27 A.M. ET
Gilts Tumble After GBP1.75B 4.25% 2049 Auction Is Uncovered
By Keith Jenkins
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--The U.K. government's latest gilt auction drew disappointingly poor demand Wednesday, data from the U.K. Debt Management Office showed.
The GBP1.75 billion tap of the 4.25% December 2049 Treasury gilt was uncovered, with a bid-to-cover ratio of just 0.93 times, sharply down from 2.03 at the previous auction of this bond, held Feb. 4.
It was the first uncovered convention gilt auction since 1995.
The yield "tail", or difference between the average and highest yields, a gauge of demand, was an exceptionally long 12.8 basis points, versus 0.2bp at the previous tender.
The average price was 95.24, for a yield of 4.506%.
"Having flirted with a failed conventional auction twice over recent weeks, the market has finally witnessed one, with the auction covered 0.93 times, and a further GBP65 million of bids rejected on the basis that they were just too low to be filled," said John Wraith, head of sterling rates at Royal Bank of Canada Capital Markets.
Immediate market reaction to the results was extremely negative, with the June gilt futures contract heading sharply lower.
At 1100 GMT, June gilts were down 1.00 on the day at 120.37, after a low of 119.45 made soon after the results were announced.
Gilt futures have now erased all their price gains made since the Bank of England announced its quantitative easing program on March 5.
Governor Mervyn King cast doubts about the possible size of the QE program in his testimony to the Treasury Select Committee Tuesday, which triggered a sharp selloff in gilts as traders looked to reduce unwanted long positions.
Analysts said that while the Bank of England's quantitative easing policy, specifically its reverse auctions where the Bank buys eligible gilts from the market, ought to provide gilts with support, these results highlight the potential discrepancies between demand for eligible and ineligible bonds.
"The Governor's perceived equivocation around QE yesterday has clearly created a market where eligible BOE buyback debt is slipping further back towards where it came from pre-QE, while ineligible debt is left horribly exposed to worries about the very heavy supply outlook and deep uncertainty over what support, if any, will be forthcoming from the Central Bank," RBC's Wraith said.
The BOE's QE remit covers gilts within the five- to 25-year maturity range.
Attention now turns to the BOE's fifth reverse auction Wednesday, when the Bank buys GBP3.5 billion of eligible gilts in the 2014-2019 maturity range. Results of the competitive leg of the operation will be published soon after the auction closes at 1445 GMT.
Gilts Tumble After GBP1.75B 4.25% 2049 Auction Is Uncovered
By Keith Jenkins
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--The U.K. government's latest gilt auction drew disappointingly poor demand Wednesday, data from the U.K. Debt Management Office showed.
The GBP1.75 billion tap of the 4.25% December 2049 Treasury gilt was uncovered, with a bid-to-cover ratio of just 0.93 times, sharply down from 2.03 at the previous auction of this bond, held Feb. 4.
It was the first uncovered convention gilt auction since 1995.
The yield "tail", or difference between the average and highest yields, a gauge of demand, was an exceptionally long 12.8 basis points, versus 0.2bp at the previous tender.
The average price was 95.24, for a yield of 4.506%.
"Having flirted with a failed conventional auction twice over recent weeks, the market has finally witnessed one, with the auction covered 0.93 times, and a further GBP65 million of bids rejected on the basis that they were just too low to be filled," said John Wraith, head of sterling rates at Royal Bank of Canada Capital Markets.
Immediate market reaction to the results was extremely negative, with the June gilt futures contract heading sharply lower.
At 1100 GMT, June gilts were down 1.00 on the day at 120.37, after a low of 119.45 made soon after the results were announced.
Gilt futures have now erased all their price gains made since the Bank of England announced its quantitative easing program on March 5.
Governor Mervyn King cast doubts about the possible size of the QE program in his testimony to the Treasury Select Committee Tuesday, which triggered a sharp selloff in gilts as traders looked to reduce unwanted long positions.
Analysts said that while the Bank of England's quantitative easing policy, specifically its reverse auctions where the Bank buys eligible gilts from the market, ought to provide gilts with support, these results highlight the potential discrepancies between demand for eligible and ineligible bonds.
"The Governor's perceived equivocation around QE yesterday has clearly created a market where eligible BOE buyback debt is slipping further back towards where it came from pre-QE, while ineligible debt is left horribly exposed to worries about the very heavy supply outlook and deep uncertainty over what support, if any, will be forthcoming from the Central Bank," RBC's Wraith said.
The BOE's QE remit covers gilts within the five- to 25-year maturity range.
Attention now turns to the BOE's fifth reverse auction Wednesday, when the Bank buys GBP3.5 billion of eligible gilts in the 2014-2019 maturity range. Results of the competitive leg of the operation will be published soon after the auction closes at 1445 GMT.
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