LONDON (Reuters) - Britain is at risk of its first failed government bond auction since 2009 due to increased financial market volatility, the head of the UK Debt Management Office has warned.
The Wall Street Journal reported on Monday that DMO chief executive Robert Stheeman said a bond auction could soon fail to attract enough buyers.
“This higher-volatility environment is a concern,” Stheeman said. “I wouldn’t be surprised if we had a failed bond auction at some point in the not-too-distant future.”
The DMO is scheduled to sell 900 million pounds ($1.37 billion) of 10-year inflation-linked bonds GBIL0E24= on Tuesday, and 2 billion pounds of 30-year conventional gilts GB30YT=RR on Thursday.
In the current financial year as a whole, the DMO aims to sell 130.9 billion pounds worth of gilts to finance Britain’s large budget deficit.
Stheeman said the gilt market was fundamentally sound, but that banks were less willing to hold bonds than a few years ago, partly because of changes to global financial rules, which added to volatility.
“When volatility dies down, we would expect auctions to go back to normal,” Stheeman was quoted as saying.
A DMO spokesman said Stheeman made the remarks on the sidelines of a financial industry conference in Amsterdam last week. Ten-year government bonds GB10YT=RR recorded their biggest swings in three years on Thursday, as part of a heavy sell-off that took yields to a six-month high.
A sale of 3.25 billion pounds of 10-year gilts GBT225= on June 2 attracted the joint-weakest level of demand since Britain’s last failed auction in March 2009, and strategists warned last week of the risk of a repeat.
Stheeman told Reuters in March that reduced liquidity and uncertainty about the outlook for U.S. monetary policy could lead to bigger price swings for British government bonds.
On Monday 10-year gilt yields GB10YT=RR were down 2 basis points on the day at 2.06 percent at 1455 GMT, outperforming German government debt DE10YT=RR which fell in price terms, lifting yields 4 basis points higher.
Yield spreads between 10-year gilts and Bunds are close to their tightest since February at 116 basis points.
Reporting by David Milliken; editing by William Schomberg