Market News

Benchmark 5-year gilt sale finds strong demand

LONDON, June 2 (Reuters) - Britain found eager buyers at an auction of benchmark five-year gilts on Wednesday, helping UK government bonds reverse early underperformance against Bunds.

Investors submitted bids totalling just under 10 billion pounds for the 4.25 billion pounds of 2.75 percent 2015 gilts GB5YT=RR on offer. That gave a bid-to-cover ratio of 2.34, just above the 2.33 achieved at the last sale of this gilt in March and well above the recent average.

September gilt futures FLGU0, which were lagging Bunds ahead of the auction, rallied to stand 33 ticks higher by 1048 GMT, outperforming the equivalent Bund contract by around 10 ticks.

Five-year gilt yields fell almost 6 basis points to a session low of 2.243 percent -- outpacing a 3 basis point drop in five-year Bund yields DE5YT=RR.

“The outperformance of the five-year sector suggests there were quite a few people in the market that did not get as many gilts as they wanted,” said Francis Diamond, gilt strategist at JP Morgan.

“The cover was good and the yield tail and price tail were reasonably small, so overall I think the auction went well.”

Gilts have rallied strongly over the past three months and the 2015 gilt sold at an average yield of 2.274 percent, more than 50 basis points less than on March 3.

The 0.7 basis point yield tail and 3 tick price tail were both slightly higher than in March but the gilt managed to clear around 6 pence above pre-auction levels.

“This gilt is currently the sweet spot of the five year sector in asset swap space, and that is attractive to market makers and proprietary dealers,” said Matteo Regesta, a fixed income strategist at BNP Paribas.

Britain will sell a further 2 billion pounds of 4.5 percent 2034 gilts GBT4H34 on Thursday, making this week the heaviest for new issuance since the first week of February.

For a table of the results, click on [ID:nLAC005721]

Reporting by Christina Fincher; editing by Patrick Graham