UK sells new 10-year bond at record-low yield on safe-haven demand

By David Milliken

LONDON, Feb 17 (Reuters) - Britain sold a new 10-year government bond at a record-low average yield in an auction on Wednesday, reflecting a surge in demand for safe-haven assets in recent weeks.

The UK Debt Management Office said it sold 2.75 billion pounds ($3.94 billion) of the new July 2026 gilt at an average yield of 1.590 percent, the lowest cost on record for conventional 10-year British government borrowing.

Gilt prices were down overall on Wednesday, reflecting a rebound in investor risk appetite and rising share prices.

But after 10-year gilt yields touched an all-time low of 1.225 percent on Feb. 11, a record-low yield at Wednesday's auction looked likely, despite some investors baulking at the paltry returns on offer in recent weeks.

"We got a reasonable concession going into the event, and in the context of recent auctions it was relatively solid," RBS (LSE: RBS.L - news) gilts strategist Simon Peck said, saying demand had benefited from yields moving off recent lows.

Last month the DMO came its closest to a failed auction since 2009, as investors shied away from pricy five-year debt, but on Wednesday investors bid for more than one-and-a-half times the amount available.

A bigger test will come next week, when the DMO aims to sell several billion pounds of a new 50-year inflation-linked bond.

Gilt prices dipped after the auction and continued to slide, with 10-year yields up 4 basis points on the day at 1.48 percent by 1300 GMT, just off a nine-day high.

There was little reaction to labour market data showing tepid underlying wage growth of 2 percent, though ahead of market expectations.

Gilts underperformed German government bonds, with the yield spread for 10-year maturities widening by 3 basis points to 120 basis points.

Peck said gilts typically outperformed in global rallies of safe-haven government bonds and underperformed during sell-offs.

UBS (NYSEArca: FBGX - news) fixed income strategist Justin Knight said there were two extra factors which had recently boosted gilt prices.

"One is worries over Brexit," he said. "The other is that in the UK, compared to the U.S (Other OTC: UBGXF - news) ., the interest rate cycles are necessarily shallower because so much lending is indexed to the front end of the curve ... so you would expect rate hikes to be priced out more quickly than in the U.S."

Fewer than half of British households expect the Bank of England to raise interest rates over the next 12 months, the lowest proportion in more than two years, a survey showed on Wednesday.

The Bank of England has cited weak wage growth as a major reason why it is keeping rates on hold, but many in markets think a referendum on European Union membership will also affect their thinking.

Prime Minister David Cameron could announce a date for a referendum as soon as Friday, which RBS's Peck said would intensify the market's focus on the political and economic risks involved.

March long gilt future 121.33 (-0.44)

June 2016 short sterling 99.41 (-0.01)

Dec (Shanghai: 600875.SS - news) 2016 short sterling 99.41 (-0.03)

10-year gilt yield 1.48 pct (+4 bps)

-------------------KEY MARKET DATA--------------------------- Long Gilt futures Gilt benchmark chain Short Stg futures Cash market quotes Deposit rates Sterling cross rates UK debt speedguide -------------------KEY MARKET REPORTS-------------------------- Gilts Sterling Euro Debt Dollar U.S. Treasuries Debt reports --------------------GILT STRIPS DATA ------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO ($1 = 0.6941 pounds) (Reporting by David Milliken)