UK Sets Record with £109 Billion in Gilt Orders Amid Rising Demand

Key Takeaway

• UK sets a record with £109 billion in orders for its gilt sale, surpassing the previous £100 billion record from 2021.
• Significant demand driven by attractive pricing and expectations of Bank of England rate cuts amid rising unemployment.
• European markets face volatility due to French political uncertainty, while US investors await key inflation data and Fed's interest rate decision.

Record-Breaking Gilt Demand

The UK has set a new record for bond demand, attracting over £109 billion ($139 billion) in orders for a gilt sale on Tuesday. This surpasses the previous record of over £100 billion for the UK's debut green bond in 2021. The government aims to raise £11 billion from this sale. Analysts noted that the pricing for the 10-year offer was attractively set at 4 basis points over a comparable gilt. Emmanouil Karimalis, a strategist at UBS Group AG, commented that the premium was "a bit higher compared to expectations," which were around 2-3 basis points.

The significant demand comes as yields on gilts have climbed this year, influenced by markets paring expectations for global monetary tightening. The Bank of England is expected to hold interest rates at its upcoming meeting this month, ahead of an election in July. This gilt syndication could be one of the last before the Bank of England starts to cut borrowing costs. Money markets currently favor a quarter-point cut by September. Data released earlier on Tuesday supported the case for a rate cut, showing that UK unemployment unexpectedly rose to its highest level in more than 2 1/2 years, while pay pressures eased. This led to gains in UK gilts, with the 10-year yield down 3 basis points at 4.29%.

The bookrunners for the gilt sale include Barclays Plc, Citigroup Inc., Deutsche Bank AG, Lloyds Banking Group Plc, NatWest Markets Plc, and Royal Bank of Canada.

European Market Jitters

European assets extended their losses on Monday as political uncertainty in France continued to weigh on investor sentiment. The euro edged lower, and the Stoxx 600 fell for a third consecutive day. US equity futures also dropped, and ten-year Treasury yields fell by four basis points as investors sought safe-haven assets.

The most significant moves were observed in French markets, where the yield on 10-year notes jumped by as much as 10 basis points to 3.32%, marking the biggest two-day increase since March 2020. This selloff widened the spread over equivalent German bonds to 64 basis points, the highest since October on a closing basis. Traders are focused on speculation that President Emmanuel Macron has been discussing his resignation if his party performs poorly in the upcoming legislative elections. A person close to Macron denied the report.

The upcoming vote risks becoming a showdown over Macron's economic policies, which have largely reassured investors since he took office in 2017. Jane Foley, head of FX strategy at Rabobank, stated, "The risk that France’s parliament may be led by the far-right may focus attention on France’s dismal fiscal situation, which could shake up the euro." She added, "We see French politics as another reason to expect that the euro is set to remain lower for longer."

US Market Outlook

Global investors are preparing for a potentially volatile session on Wednesday, with the latest US consumer price data and the Federal Reserve's interest rate decision due. While policymakers are widely expected to keep borrowing costs on hold, there is less certainty regarding officials' rate projections. According to a Bloomberg survey, a 41% plurality of economists expect policymakers to signal two cuts in their "dot plot," while an equal number expect the forecasts to show just one or no cuts at all.

Wei Li, BlackRock Global Chief Investment Strategist, told Bloomberg TV, "Even if we just get one cut this year, I think we’re just cashing out. The equity market can take it because we’re really focusing on the earnings and growth piece, which has been driving equities rather than rates this year."

Among US single stocks, Apple Inc. is set to extend losses after the iPhone maker's debut of long-awaited artificial intelligence features failed to enthuse traders.

Street Views

• Emmanouil Karimalis, UBS Group AG (Neutral on UK Gilts):

  "The premium was a bit higher compared to expectations. The market was expecting 2-3 basis points."