UK sells highest yielding government bonds since 1999

LONDON, Jul 5 (Reuters) – Britain sold a government bond at auction on Wednesday that will pay investors an annual yield of 5.668%, the highest yield on any gilt sold this century, as markets demand returns in anticipation of more Bank of England actions. rate goes up.

The UK Debt Management Office sold 4 billion pounds ($5.08 billion) of a government bond due to mature in October 2025, attracting strong demand of 2.77 times the volume of the offer, up from 2.34 times when gilt was previously sold on June 7. .

The last time the average yield in a gilt auction was higher was in September 1999, when £2.7bn of 10-year gilts were sold at an average yield of 5.694%.

Less than two years ago, before the BoE started raising interest rates and when inflation was close to its 2% target, government bonds were sold at auction with yields below 1%.

The auction highlights how the cost of British government borrowing has skyrocketed this year. When October 2025 gilt was sold at auction last month, it yielded 4.874%, and at its launch in January it paid investors a 3.634% yield.

Last month the BoE unexpectedly raised its main interest rate from 4.5% to 5% as Governor Andrew Bailey said inflation looked more persistent than expected, and financial markets currently expect rates to peak at 6.25% in December.

Consumer price inflation held at 8.7% in May, with the latest BoE forecasts showing it falling to just over 5% by the end of this year and below 2% by early 2025.

As a result, real inflation-adjusted returns for investors are likely to be much lower than when gilts last had similar nominal returns in the late 1990s.

The October 2025 gilt is also unusual in paying a higher yield than other gilts of similar maturity. NatWest bond strategists last week described it as “one of the cheapest UK curve-fitting bonds.”

Yields on benchmark two-year gilts peaked at 5.406% on Monday, their highest level since June 2008, and were down 4 basis points on Wednesday at 0945 GMT to 5.28%.

($1 = 0.7873 pounds)

Reporting by David Milliken; Edited by Toby Chopra

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