UK 2049 gilt sale draws strong demand from pension funds

LONDON Feb 4 (Reuters) - The UK Debt Management Office's second gilt auction in as many days met very strong demand on Wednesday after pensions funds snapped up the 2049 issue.

The DMO received bids totalling more than 4 billion pounds ($5.76 billion) for the 2 billion pounds of securities on offer, giving a comfortable cover ratio of 2.03 and a 0.2 basis point yield tail.

Analysts said that was the best result in a sale of ultra-long gilts since 2004.

"It went extremely well, as did the one earlier this week," said Christian Lawrence, rates strategist at RBC. "Gilts look fairly cheap at the moment and it was the perfect point on the curve for liability-driven investors."

The past months' stock market falls have hit long-run projected investment returns at British pension funds, which have high fixed liabilities for pensions due to be paid out.

Wednesday's issue offers them a guaranteed return of around 4.57 percent for the next 40 years to help plug this gap, 3 basis points higher than they would have achieved in October.

"Demand for long gilts has not been this strong since the introduction of the 2004 Pensions Act and the FRS17 accounting rules," said Owen Roberts, a bonds strategist at Morgan Stanley.

Prices for long gilts rose after the auction, with the yield on the 40-year gilt GB40YT=RR dropping by more than 10 basis points in the hour after the auction to a two-week low of 4.433 percent.

Sterling's sharp fall against the euro EURGBP= and dollar GBP= since October makes British government debt look cheap for foreign investors, few of whom expect the pound to remain as weak as it is now over the medium term.

Government bonds have been one of the strongest performing asset classes over recent months.

Research by Morgan Stanley and the Institute for Fiscal Studies last week said that new rules to boost banks' liquidity reserves could trigger more than 100 billion pounds of new demand for gilts next year [ID:nLS701584].

This is good news for the DMO which has to shift record volumes of gilts this year and next to fund Prime Minister Gordon Brown's fiscal stimulus plans and bank recapitalisation as Britain faces the worst economic downturn of any big economy.

Tuesday's auction for December 2011 gilts at the other end of the curve also produced a strong result, with a cover ratio of 2.01 and a 0.7 basis point yield tail.

Some strategists said the demand mostly came from investors switching from the disproportionately lower-yielding March 2011 gilt rather than representing outright demand for the maturity. * For full results for Wednesday's auction, go to [nLAC003118] * For full results for Tuesday's auction, go to [ID:nLAJ000137] (Additional reporting by Christina Fincher; Editing by Toby Chopra)