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. The yield on the 4.25 percent gilt due 2049 rose 10 basis points to 4.55 percent.
Brown’s government aims 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. The prime minister’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.
“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.”
The yield on the 10-year gilt rose five basis points to 3.38 percent by 2:15 p.m. in London. The 4.5 percent note due March 2019 slid 0.42, or 4.2 pounds per 1,000-pound face amount, to 109.44. The yield on the two-year note rose three basis points to 1.28 percent. Yields move inversely to bond prices.
Britain’s 4.25 percent bonds due 2049 yielded 86 basis points more than the U.S. Treasury’s 3.5 percent securities maturing in 2039, up from 81 basis points yesterday.
The pound weakened to $1.4622, from $1.4681 yesterday, and to 92.60 pence per euro, from 91.72 pence.
Chancellor of the Exchequer Alistair Darling ordered 20 billion pounds in tax cuts and spending increases in November and forecast a deficit of 8 percent of gross domestic product. Britain will have a deficit of 11 percent of GDP in 2010, the highest in the Group of 20, according to the International Monetary Fund.
The U.K. economy shrank 1.5 percent in the fourth quarter, the most since 1980, and King yesterday predicted a similar drop for the first three months of this year.
“This sinks Brown below the waterline,” said Bill Jones, professor of politics at Liverpool Hope University. Brown’s “whole strategy is based on borrowing and now he can’t get anyone to buy his gilts. This means the prospect of going cap in hand to the IMF hovers increasingly into view.”
Brown’s Labour Party has the support of 30 percent of voters, compared with 46 percent for the opposition Conservative Party, according to a ComRes opinion poll published in the Independent on Sunday on March 22. The company surveyed 1,002 people by telephone between March 18 and March 19.
The auction failure comes as the Bank of England uses newly printed money to purchase government and corporate debt in an attempt to drive down borrowing costs. The Treasury gave the central bank authority March 5 to purchase as much as 150 billion pounds of securities.
“It doesn’t help to have your central bank say it’s buying government debt and then when you’re selling it you can’t find enough buyers,” Kit Juckes, head of fixed-income research at Royal Bank of Scotland Group Plc in London, said in an interview today on Bloomberg Radio. “It doesn’t impress.”
The risk of failed auctions is increasing as governments around the world boost spending to revive their economies after financial institutions incurred more than $1 trillion of losses and writedowns since the start of 2007. Germany said today it plans to sell a record 346 billion euros ($470 billion) of bonds this year. U.S. sales will almost triple to a record $2.5 trillion this year, according to Goldman Sachs Group Inc.
The DMO said as recently as December there was a possibility of a failed auction. “We are in a very different world than we were six months or a year ago,” Robert Stheeman, chief executive officer for the agency, said in an interview.
The U.K. had two failures 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 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.
To contact the reporter on this story: Kim-Mai Cutler in London at email@example.com
Last Updated: March 25, 2009 10:32 EDT
By Kim-Mai Cutler