UK sells £4 billion of government debt at highest yield since 2007

July 9, 2023

The United Kingdom's (DMO)  4 billion in government debt as two-year  Wednesday with an average annual  of 5.668%, the highest since June 2007.

In the UK, the DMO issues gilts, called '' in other countries, as to finance the government's spending when it exceeds the revenue generated from taxation.

Despite strong demand, with bids for the gilts totalling over £11 billion, returns were pushed to a fifteen-year high because, media reported, traders believed the Bank of England (BoE) would continue raising interest rates, and because of high inflation devaluing returns.

On June 22, the Bank's upped its  in the thirteenth consecutive rise from 4.5% to 5% after "significant upside news in recent data that indicates more persistence in the  process".

That day, HSBC asset strategist Joseph Little told Reuters the BoE may increase its main interest rate to up to 6% because "[i]nflation pressures show more persistency and more momentum than other Western economies, and that forces the Bank into a corner". Reuters additionally reported investors believed rates would climb to about 6.25% sometime December before falling.

The effect of higher interest rates is that the same gilts with a of October 2025 sold for an average yield of 4.874% last month and for 3.634% in January. However, bond specialists told Reuters last week the gilts were "one of the cheapest bonds on the UK fitted ".

UK inflation held at 8.7% in May, contrary to forecasts, while, which excludes certain consumables like food and energy, increased to 7.1% from 6.8% in April, a high not seen since 1992. The BoE consequently revised its projection that by the end of 2023 inflation will come down to about 5%, not 4%.

In June 2007, the UK offloaded £2.5 billion worth of five-year gilts with an average yield of 5.790%.

At 08:17 (0717 UTC) Thursday, the yield on two-year gilts was 5.429%, while the ten-year gilt at 08:19 was 4.548%.