By David Milliken
LONDON, July 15 (Reuters) – The difference between short- and long-term British government borrowing costs widened on Wednesday to its greatest since the Bank of England (BoE) restarted its programme of asset purchases in March to limit the economic impact of COVID-19.
Although bond yields remain very low by historical standards, this steepening yield curve reflects a tension between ongoing gloomy short-term data and rapidly rising estimates of British government borrowing needs.
Britain’s Office for Budget Responsibility (OBR) said on Tuesday that new borrowing could approach 400 billion pounds ($506 billion) this financial year if the economy struggled to recover.
The five-year/30-year yield curve steepened by 4 basis points on Wednesday to 74 bps, its widest since March 18, when gilt markets were in turmoil until the BoE announced 200 billion pounds of asset purchases a day later.
Wednesday’s move was driven by a record-low negative yield at a three-year gilt auction, followed by patchy demand at a subsequent sale of 2057 gilts, and continues a steepening trend in the gilt yield curve that started in April.
At the sale of 2057 gilts , the difference between the yield received by the lowest bidder and the average bidder was the greatest since an auction on March 19, just before the BoE launched its stimulus.
British government bond yields across the board have fallen since the start of the year – reflecting the gloomier economic global outlook created by the massive short-term damage wreaked by COVID-19, and unprecedented stimulus measures by the BoE.
However, since April longer-dated yields have remained broadly stable at a historically low level, while short-dated gilt yields have hit new lows as the chances of a snap-back in economic activity recede and further stimulus remains likely.
BoE policymaker Silvana Tenreyro said on Wednesday that a sharp, V-shaped recovery looked likely to be disrupted, and cutting official rates below zero remained an option.
Britain’s Debt Management Office will announce on Thursday how much it will sell at auction between September and November.
Analysts at Citi said they estimated it would issue 110 billion pounds over the period, taking total issuance since April to 385 billion pounds.
“The full-year funding picture remains highly uncertain. The OBR’s upside/downside scenarios – combined with our own assumptions – imply a plausible range of 427-555 billion pounds for the financial year 2020-21 gilt remit,” they told clients. ($1 = 0.7912 pounds) (Reporting by David Milliken; Editing by Andy Bruce and Alex Richardson)
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