Demand for UK debt at the Government’s auctions has fallen to the lowest level for more than a decade and a half.
The average number of bids for each pound of debt offered at the past three government debt auctions averaged out at 1.43 – the lowest so-called bid-to-cover ratio in any comparable period since 1997, when the Debt Management Office was set up.
The cover ratio is regarded as a key measure of investor demand for UK debt, and although it is typically volatile from auction to auction it has been falling steadily in recent months. For most of the past decade it has been closer to 2, meaning there are around double the number of bids for every available bond on offer.
This morning’s £4.75bn auction of five-year debt was covered only 1.33 times – the lowest ratio for a year. However, a rolling three-auction average provides a more reliable trend-line of market demand.
Of course, this is only one measure of investors’ appetite for Government debt – another is the interest rate it is taking to persuade them to invest. The rate – or yield – on 10-year government debt has now risen to the highest level for 18 months, hitting 2.3% earlier this morning.
Both phenomena are symptomatic of a broader concern in international bond markets: there are fears growing that with the global economy apparently recovering central banks are about to halt (or in some cases reverse) their quantitative easing programmes. Given those programmes involved them buying up massive quantities of Government debt, it is unsurprising that their prospective departure from the market is spooking investors.
After all, under its QE programme the Bank of England bought government debt equivalent to almost every single extra pound of new debt issued by the Treasury over the past four years.
Now, government borrowing rates have risen everywhere – not just the UK. However, in one respect, the tension over UK borrowing rates is particularly great. There is a big question mark over whether the new Bank of England Governor, Mark Carney, will want to do more QE or not. That UK-specific insecurity will last for a while longer, as it isn’t until early August that Mr Carney will explain how he intends to change the way the Bank conducts its operations. So expect higher borrowing costs – and a bumpy time in the bonds market – for a while longer yet.