Strong demand for three-year UK gilts

By Thomas Belayneh

This morning the UK’s Debt Management Office (DMO) announced the allotments of its latest auction of three-year UK government bonds.

The auction was for £3.75 billion at a yield of 0.75%. Incredibly, the issue was heavily oversubscribed with bids totalling approximately £8.15 billion, which was more than two times than what as on offer.

The rounded average price accepted on the three-year bonds was £102.388 which implied a negative yield of -0.003%. This is the UK’s first sale of negative yielding debt since its one-month debt sale yielded negative rates back in 2016.

The lowest accepted bid implied a yield of 0.001% whilst the highest accepted bid implied a yield of -0.007%.

The DMO also announced a further £937.5 million of debt would be made available at the -0.003% yield for those who had their bids accepted, bringing the total lent to the UK treasury for three-years from today to approximately £4.7 billion.

The results of this auction comes amidst talk of negative interest rates at the Bank of England, which understandably spooks investors in UK banks, as they look to Europe and Japan as a reminder of how negative rates can harm bank profitability.

No surprise that RBS is down 1.83% versus a 0.41% rise in the FTSE 100 as today’s news weighs on investor sentiment.

Even more rests on the PMIs coming up later this week, on Thursday, which could help arrest the anguish regarding the future outlook for inflation, economic activity and of course interest rates.