Brexit 'trash talking' lifts UK debt demand to US$99b

[LONDON] Rising tension between the UK and European Union over trade is proving to be a boon for the nation's first syndicated bond offering since June.

The UK will sell 8 billion pounds (S$14.2 billion) of 15-year debt after attracting bids in excess of US$99.2 billion, according to a person familiar with the sale, who asked not to be identified because they're not authorised to speak about it. The bonds were priced at about 13 basis points over similar-maturity debt.

"The approaching Brexit deadline and trash talking ahead of the next round of negotiations is dampening risk appetite," prompting investors to favour safer assets, said Antoine Bouvet, a senior rates strategist at ING Bank. Also, "the last Bank of England meeting boosted market hopes of another round of quantitative easing and seemed to downplay the odds of negative rates," he said.

Benchmark UK gilts extended gains on Tuesday to take yields down three basis points to 0.22 per cent. Yields also fell on Monday following a report suggesting Prime Minister Boris Johnson's administration is preparing to end the Brexit transition period without an economic agreement with the EU. Last week, BOE Deputy Governor Dave Ramsden told lawmakers the central bank has the capacity to increase the pace and size of its asset purchases if needed.

Such conditions look set to spur a narrowing of the yield premium on longer-maturity gilts over shorter-dated ones - and that prospect should support demand at this sale, Mr Bouvet said.

The issuance is part of the UK's plan to offer an unprecedented 385 billion pounds of debt this financial year to fund a surge in fiscal spending to counter the economic shock from the coronavirus.

A similar syndication of 10-year notes in May attracted record orders in excess of 82 billion pounds. Bond sales via banks have been an increasingly popular way to issue debt this year as governments ramp up borrowing to fight the pandemic, as the method allows larger-than-usual amounts to be raised.

Banks involved in the deal, which include Royal Bank of Canada, Citigroup and Lloyds Banking Group, agree to underwrite the offering in return for fees, avoiding the embarrassing possibility of failing to find sufficient demand.

The UK's Debt Management Office set a coupon of 0.625 per cent on the securities which mature in July 2035. That compares with a yield of 0.46 per cent for 15-year notes in the secondary market.

BLOOMBERG