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UK bond auction success in face of S&P negative watch

The Government successfully issued £5bn of gilts this morning in the face of Standard & Poor’s negative outlook on the UK.

Yesterday Standard and Poor’s put the UK on a negative ratings watch due to the fact that Government debt is close to 100 per cent of UK GDP, sparking fears that the UK could lose its AAA status.

But that decision had little affect on the gilt auction, which attracted bids for 2.6 times the issuance. The auction was for £5bn of 2.25 per cent Treasury gilts, dated 2014.

The Debt Management Office also revealed today that it would be looking to UK banks to help it with bond auctions over the comings months for the first time in four years.

DMO chief executive Robert Stheeman says: “We are about to embark on one of our most challenging financing schedules to date, with 26 operations to be carried out over the next four months.

“The summer will also see the launch of our syndication programme designed to support the auction programme and facilitate increased issuance of long-dated and index-linked gilts. I am very grateful for the constructive discussions we have had with market participants to date on the syndication programme and we will continue to refine our plans in this area in the weeks to come.”

M&G retail fixed interest senior portfolio analyst Michael Riddell says: “So does it matter if the UK does eventually get downgraded to AA? Judging by this morning’s very successful UK government bond issue, not much.

“Also, a credit rating downgrade doesn’t necessarily mean government bond yields will rise – Moody’s downgraded Japan to A2 in June 2002, which was lower than the credit rating of Botswana at the time, and that didn’t stop 10-year Japanese government bond yields getting to 0.4 per cent in May 2003.”

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