Britain suffers first failed gilt auction since 2002

By David Milliken

LONDON (Reuters) - Britain suffered its first failed government bond auction since 2002 on Wednesday after bids fell more than 100 million pounds short of the 1.75 billion pounds the government was trying to raise.

Gilt prices initially tumbled but market strategists said the result did not suggest Britain was facing an incipient funding crisis as it prepares to issue a record amount of gilts this year and next to fund extra spending through the recession.

Instead, they blamed opaque Bank of England gilt-buying plans for the fact the UK Debt Management Office (DMO) could not find enough bidders for the 2049 gilt at an auction where there would usually be heavy demand from pension funds and insurers.

"There's a state of confusion in the market at the moment. It requires greater clarity from the BoE on what its aims are," said Sean Maloney, strategist at Nomura International.

Bank Governor Mervyn King said on Tuesday the central bank could scale back its gilt purchases if they rapidly boosted the economy. This caused gilt futures to fall by their most in nearly a month as investors worried the BoE might not buy the 75 billion pounds of assets they had expected in the next 3 months.

Robert Stheeman, the head of Britain's Debt Management Office, said he was not too concerned but would get worried if it became a pattern.

"The market is unusually volatile at the moment. It is trying to digest a lot of news," he told Reuters in an interview. "If we were to see several uncovered auctions we would have to ask why."

The Bank currently only buys 5-25 year gilts in its asset purchase scheme, which started this month and aims to boost the money supply and plug the spending gap caused by the recession.