UK yields hit 2-week high as gilt issuance plans surprise to upside

LONDON: Gilt yields hit a two-week high after Britain said it planned to sell more government bonds than the market had expected, despite finance minister Philip Hammond largely sticking to existing fiscal plans in Wednesday's annual Budget.

Britain's Debt Management Office (DMO) said it intended to sell 115.1 billion pounds ($139.9 billion) of government bonds in the 2017/18 financial year starting in April, down sharply from 146.5 billion pounds in the current year.

This was still 5 billion pounds more for 2017/18 than primary dealers polled by Reuters had expected.

Some were surprised that the DMO decided to cut its stock of Treasury bills by 9.5 billion pounds next year, resulting in the slightly higher-than-expected planned issuance of gilts.

"As a result, (gilt) market reaction was consistent with a mild disappointment," said RBC analysts Sam Hill and Vatsala Datta in a note to client.

Ten-year gilt yields, which had already been pushed up by an upbeat report on the US labour market, struck a two-week high of 1.251 percent after the DMO announcement. They were last at 1.23 percent, up around 4 basis points on the day.

Twenty- and 30-year gilt yields also neared two-week highs. There was little move in short-dated bonds.

Earlier on Wednesday Hammond said stronger-than-expected economic growth since June's Brexit vote means Britain's budget deficit is likely to fall much faster than previously thought in the current financial year to just under 52 billion pounds or 2.6 percent of GDP.

The Office for Budget Responsibility now expects the government will need to borrow 23.5 billion pounds less from 2016/17 to the 2020/21 financial year than it projected in November.

Hill and Datta from RBC said they thought the fall in planned gilt issuance as well as an increase in redemptions would support gilt prices over the coming financial year, helping to offset off a pause in the Bank of England's asset purchase programme.

The DMO's split of short-, medium-, long- and index-linked bonds to be sold in 2017/18 was as expected by primary dealers, being slightly slanted towards long-dated bonds but otherwise evenly split.

The spread offered over the equivalent German Bund narrowed around a basis point on the day to 85 basis points, as poor demand at an auction of German five-year paper caused Bund yields to increase by more than their British counterparts.