U.K. Bond Auction Fails for First Time Since 2002

U.K. Bond Auction Fails for First Time Since 2002

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.

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.

“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 four basis points to 3.37 percent by 1:26 p.m. in London. The 4.5 percent security due March 2019 slipped 0.36, or 3.6 pounds per 1,000-pound face amount, to 109.47. The yield on the two-year note rose two basis points to 1.28 percent. Yields move inversely to bond prices.

Pound Declines

The pound weakened to $1.4588, from $1.4681 yesterday, and to 92.33 pence per euro, from 91.72 pence.

Chancellor of the Exchequer Alistair Darling ordered 20 billion pounds ($29 billion) 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. “His 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.”

Waning Popularity

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 DMO said as recently as December the government’s plan to increase spending raised the risk 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 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.

BLOOMBERG