UK gilts rally after strongest auction demand in three weeks

LONDON (Reuters) - British government bonds rallied and five-year yields touched their lowest in two months, after strong investor demand at an auction of 2 billion pounds of 12-year gilts, a day after Britain sold its first bond with a negative yield.

Investors bid for almost three times the volume on offer of the 4.25% 2032 gilt <GB12YT-RR> <GBT4Q32=>, the highest bid-to-cover ratio for a conventional gilt auction since April 28. The gilt sold at an average yield of 0.321%.

Gilt future prices rallied by around 15 ticks after the auction result to their day's high, and 10-year yields hit a three-day low of 0.199%. Five-year yields dropped to their lowest since March 9 at 0.020%, down 3 basis points on the day.

Britain sold a three-year gilt with a negative yield for the first time on Wednesday. At a syndication of a new 10-year gilt last week, investors placed over $100 billion in orders.

Strong demand for gilts partly reflects hefty ongoing buying by the Bank of England in the secondary market.

(Reporting by David Milliken; Editing by William Schomberg)