UK Sees Solid Demand for 30-Year Bond Sale at Higher Yields

The UK's Debt Management Office (DMO) received a record £68.4 billion of orders for a new 30-year gilt, indicating strong demand despite higher yields. The sale of £6.0 billion of the new 30-year gilts was around £1 billion more than planned, thanks to the robust interest from investors. The 30-year benchmark gilt yield had fallen 8 basis points on the day to 3.633% by 1615 GMT, representing about 2 bps of outperformance versus German and U.S. bonds.

The strong demand for the UK's 30-year bond sale can be attributed to several factors:

1. High demand from domestic investors: The DMO reported that domestic investors accounted for around 90% of the sales for the 30-year gilt, indicating strong support from the core investor base.
2. Pension funds and life insurers: These investors typically have long-term liabilities and are required to hold assets that match these liabilities. Thirty-year gilts are an attractive option for them as they can help hedge against long-term inflation risks.
3. Global surge in inflation and higher central bank interest rates: The global surge in inflation and higher central bank interest rates have caused bond prices to tumble, making long-term bonds like the 30-year gilt more attractive to investors seeking higher yields.
4. High order book: The DMO received a record £68.4 billion of orders for the new 30-year gilt, indicating significant interest from investors.
5. Successful launch: The DMO was able to sell £6.0 billion of the new 30-year gilts, around £1 billion more than planned, thanks to the strong demand.

International factors, such as US government bond yields, can also influence UK gilt yields. The recent rise in UK gilt yields has been largely driven by the sharp uptick in US government bond yields since the end of 2024. This has meant market predictions of interest rate cuts from the Federal Reserve (Fed) have reduced, with current expectations showing potentially only one 0.25% cut in 2025. This shift in expectations has also contributed to the rise in gilt yields.

The UK's economic growth and inflation outlook have also had an impact on gilt yields. The UK's economic growth has been weak, with GDP figures from the third quarter and October 2024 showing no growth. This slow growth can lead to lower tax revenues for the government, which may increase the need for borrowing. When the government borrows more, it issues more gilts, increasing the supply of gilts in the market. This increased supply can lead to a decrease in gilt prices and an increase in gilt yields.

Inflation has been proving sticky in the UK, with wage growth remaining high. This adds to worries that inflation might not actually come down to target in 2025. The latest consumer price inflation (CPI) figure from November was 2.6%, up from 2.3% in October. Inflation erodes the real value of the income from bonds, making them less attractive to investors. As a result, investors demand higher yields to compensate for the higher inflation risk, leading to an increase in gilt yields.

In conclusion, the strong demand for the UK's 30-year bond sale, despite higher yields, can be attributed to a combination of factors, including high demand from domestic investors, the attractiveness of long-term bonds to pension funds and life insurers, and the global surge in inflation and higher central bank interest rates. International factors, such as US government bond yields, and the UK's economic growth and inflation outlook have also played a role in influencing gilt yields.