U.K. Government Bonds Take Hit From Johnson’s Spending Plans

(Bloomberg) -- U.K. sovereign bonds slid as markets started to factor in plans for greater spending by Boris Johnson’s new government.

The securities led losses across Europe after the U.K.’s Debt Management Office said on Tuesday that gilt sales will increase by 14 billion pounds ($18 billion) in the 2019-2020 financial year, which ends in April. They pared their declines after the first sale of 2020 was oversubscribed by almost two-and-a-half times the amount on offer.

Gilts started the year strongly, with 10-year bonds recording their longest winning streak since October, partly on the back of deteriorating global risk sentiment. But that trend came to an abrupt end this week, as Chancellor of the Exchequer Sajid Javid announced he would increase borrowing for investment by jettisoning government fiscal rules in his first budget in March.

“A more expansionary fiscal policy means that investors have scaled back rate-cut expectations,” said Mikael Olai Milhoj, a senior analyst at Danske Bank A/S.

The chances of gilt bulls getting relief from the incoming Governor of the Bank of England Andrew Bailey are falling. Investors in money markets are now pricing in a 52% probability of a quarter-point interest-rate cut from the Bank of England by the end of December 2020, compared with 56% on Monday.

The DMO’s total 136.8 billion pounds of borrowing in this financial year was higher than its previous estimate made in November. Johnson’s ruling Conservative party committed to increasing spending and borrowing in its campaign for the Dec. 12 election, in which it won a sizable majority, allowing it to push its plans through Parliament.

“This quarter has gone from being fairly light to one of the heaviest for conventional gilt supply over the last decade,” said Banco Santander SA rates strategist Adam Dent. “The extra supply is all in the belly of the curve, explaining why the long end is doing relatively well.”

Yields on 10-year gilts rose as much as five basis points to 0.82%. After the debt sale, of bonds maturing in 2029, the yield was up two basis points at 0.79%. Equivalent German bund and U.S. Treasury yields were little changed. With much of the U.K.’s extra issuance coming in shorter maturities, the country’s five-year bonds fared worst, while 30-year debt held its ground.

To contact the reporters on this story: Greg Ritchie in London at gritchie10@bloomberg.net;James Hirai in London at jhirai3@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Neil Chatterjee, Michael Hunter

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