UK’s five-year bond sale saw the weakest demand since 2022

The UK’s Debt Management Office (DMO) only managed to sell £4.75 billion in five-year government debt on Wednesday, but the demand came in at the weakest level since late 2022, according to data from Bloomberg.

The auction got a cover ratio of 2.80, which means buyers only placed bids worth 2.8 times the amount on offer. The issue matures in 2030 and comes amid growing investor concerns about the UK government’s worsening fiscal outlook.

This poor showing followed an even weaker performance on Tuesday, when a 30-year gilt sale drew the lowest interest seen in more than two years. Both events suggest investors are starting to back off despite yields surging to multi-decade highs.

The Treasury is trying to raise cash to fill a large budget gap ahead of a November fiscal update, but that plan isn’t convincing the market. The spike in yields has done little to offset mounting concerns about ballooning borrowing needs.

Reeves faces resistance as fiscal doubts grow

The five-year sale did manage to hold together better than Tuesday’s offering based on one key metric. The tail, the gap between the average price and the lowest accepted bid, was just 0.4 basis points for the five-year notes.

That’s a lot tighter than the 1.4 basis points recorded for the 30-year sale. Because of that, markets didn’t panic. The five-year yield held steady at 4.10% after the results landed.

But underneath that calm, trouble’s building. Chancellor of the Exchequer Rachel Reeves is under pressure to explain how she plans to plug the budget hole without sending borrowing costs even higher. Last month, the UK government blew past its borrowing forecast by £18 billion. The lack of trust is now hitting the long end of the gilt curve hardest.

The 30-year yield stood at 5.51% after the five-year sale, down just four basis points from earlier in the day, and after being down by more than five basis points before the auction. Longer maturity bonds have faced the sharpest pressure this year, especially as pension funds, which traditionally soak up this debt, have reduced their participation.

Bank of England trims long-end bond exposure

The Bank of England (BOE) has responded to the volatility. It announced last week that starting next month, only 20% of its quantitative tightening (QT) sales will focus on long-term bonds. That’s a sharp drop, and a clear effort to calm markets. The BOE will now aim its bond-selling efforts at short- and medium-term debt, where demand has remained somewhat stable.

The DMO has also been shifting strategy. After hearing repeated calls from both investors and dealers, the agency has gradually tilted its issuance toward shorter maturities so they can reduce stress on the long end of the curve and reflect what the market can actually absorb.

The next big test comes Thursday, with auctions of 9-year and 13-year gilts. Investors will be watching closely to see if appetite holds up in that middle range. Today’s sale wraps up the UK’s long-maturity gilt issuance for the year, apart from a few remaining items like green bonds, tenders, and further QT operations by the BOE.

The BOE on Wednesday also warned of a rapid unwinding of their trades poses a risk to financial stability. Governor Andrew Bailey cited last week’s moves as the latest evidence that “we are living in a period of more volatile markets.”

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