Gordons run out of credit

[Albus]

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6KhEW.jkmdE&refer=home

March 25 (Bloomberg) -- The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.

Gilts slumped after the London-based Debt Management Office, which manages bond auctions on behalf of the Treasury, said investors bid for 1.63 billion pounds of the 40-year securities. The last time the U.K. government was unable to attract enough investors was in 2002 when it tried to sell 30- year inflation-protected bonds.

“This is a warning signal investors are sending to the government,” said Neil Mackinnon, chief economist at hedge fund ECU Group Plc in London, who helps manage about $1 billion in assets and is a former U.K. Treasury official. “Investors are giving the thumbs down to the gilt market.”

Prime Minister Brown’s government plans to sell a record 146.4 billion pounds of debt this fiscal year and as much as 147.9 billion pounds in 2010 as he tries to pull Europe’s second-largest economy out of its worst recession since 1980. Brown’s plan drew criticism yesterday when Bank of England Governor Mervyn King told lawmakers in Parliament in London the government should be “cautious” about spending and deficits.

“Brown’s situation is economically extremely uncertain and highlights how we are now in uncharted territory,” said Mark Wickham-Jones, a professor of politics at Bristol University.

The yield on the 10-year gilt rose five basis points to 3.43 percent by 12:57 p.m. in London. The 4.5 percent security due March 2019 slipped 0.47, or 4.7 pounds per 1,000-pound face amount, to 109.36. The yield on the two-year note rose two basis points to 1.28 percent. Yields move inversely to bond prices.

Past Failures

The U.K. had two failed auctions in the past 10 years, the most recent in September 2002 when the Treasury received bids for 95 percent of the 900 million pounds of the 30-year inflation-protected bonds offered, according to the DMO’s Web site. The other failure was in 1999, when it tried to sell 500 million pounds of inflation-protected bonds.

“The risk of uncovered auctions is a normal part of the process,” said Sarah Ellis, a spokeswoman for the DMO in London. “Today’s auction was at the riskiest part of the curve. An additional factor which may have deterred some bidders is the imminent end of the financial year.”

An official at the Bank of England declined to comment.

[Albus]

1. The Guardians take on it

http://www.guardian.co.uk/business/2009/mar/25/uk-economic-rescue-in-crisis

Efforts to rescue the UK economy were plunged into fresh uncertainty this morning after the government failed to find a buyer for some of its debt, the first such failure in seven years.

City dealers blamed Mervyn King, the Bank of England's governor, for sowing confusion after he warned earlier this week that the UK could not afford another stimulus package.

The UK debt management office said it attracted just £1.62bn of bids for a sale of £1.75bn of 40-year gilts. Normally, such auctions of government debt are oversubscribed. This was the first failure of an auction since 2002.

Analysts warned that it cast doubts on the government's ability to borrow billions of pounds to stimulate British economic activity.

William Hague, standing in for David Cameron at prime minister's questions today, said investors were no longer interested in holding UK government debt, and claimed the government had lost control of the public finances.

Deputy Labour leader Harriet Harman denied that there was a general problem in the gilt market.

The Bank of England had begun buying up gilts and corporate debt through its quantitative easing (QE) programme, which is designed to boost the money supply and get the economy going again.

But on Monday King suggested that the Bank might not need to create the full £75bn assigned to QE.

"This is a direct result of yesterday: the fact that this gilt auction has failed means that we're just not getting the benefits of QE. Mervyn King was never a big convert," said Graham Turner, analyst at GFC Economics.

"The bond market is just failing – investors can see there's a row between King and the government, and he's not committed. This is the problem with trying to run a separate monetary and fiscal policy," Turner added, referring to King's other remark on Monday that there was little room for the government to engage in further fiscal easing.

The gilts market has been alarmed by King's comments, as demand for gilts will be hit if the Bank buys fewer than planned. Bond prices plunged this morning and look to be on course to record their biggest weekly loss in at least six years. As a result of falling prices, yields (income relative to price) shot higher.

"I just think there's a state of confusion in the market at the moment. It requires greater clarity from the Bank on what its aims are in this process," said Sean Maloney, strategist at Nomura International.

More than half the big fall in gilt yields since the Bank announced its QE programme has now been reversed. A key aim of QE was to push down yields, thus reducing further borrowing costs in the economy.