UK green bond draws US$26bil bids at highest yield since 1998

LONDON: The United Kingdom’s green bond sale has already pulled in more than £24bil (US$25.7bil or RM119bil) of orders as investors snap up yields at their highest since 1998 amid a market meltdown.

It is the first major examination of UK debt demand after a rout triggered by the new government’s economic plans to ramp up borrowing.

While the bidding is about five times the amount expected to be sold by the Debt Management Office (DMO), the previous offering of the green bond last year drew a much heftier £74bil (RM365.8bil) order book.

It’s “just not the market that the DMO wanted to issue paper in,” said Pooja Kumra, senior European rates strategist at TD Securities. “My key concern is how the markets absorb the paper post pricing.”

The bond, which matures in 2053, is being offered at one basis points above an outstanding 2052 bond, according to a person familiar with the matter, who asked not to be identified because they’re not authorised to speak about it.

The transaction, delayed after the death of Queen Elizabeth II earlier this month, is expected by NatWest to raise around £5bil (US$5.4bil or RM24.7bil).

Yet bondholders have taken fright after Chancellor Kwasi Kwarteng last Friday unveiled the country’s biggest fiscal giveaway in half a century and the DMO lifted its bond sales for this fiscal year by about £62bil (RM306.4bil).

Long maturity bonds extended losses yesterday as the sale process started, with 30-year yields soaring above 5%.

The country’s bond supply is surging just as the Bank of England (BoE) starts to offload gilts from its portfolio, part of efforts to roll back monetary stimulus.

Planned tax cuts are also likely to spur inflation, with BoE’s chief economist saying the fiscal policies needed a significant response.

“A lot of investors are going to be nervous about trying to digest that gilt supply over the next few days. This is a big problem,” said Craig Inches, head of rates and cash at Royal London Asset Management.

Moody’s Investors Service warned the UK government that its new mini-budget risks doing lasting damage to the nation’s debt affordability.

The assessment came shortly after the International Monetary Fund delivered a stinging rebuke of the tax cuts by calling them excessive and in need of revision.

The new sale is for green bonds, which fund environmental projects and typically pull in strong demand thanks to interest from specialist ethical funds. — Bloomberg

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