960424

British 10-yr

gilt auction

lapped up

by the market

LONDON: Investors queued up to buy at a 10-year gilt auction on Wednesday, analysts said.

The Bank of England auctioned three billion stg of 7-1/2 percent gilts due 2006 and received bids worth 7958 million stg -- adding up to cover of 2.65 times.

The yield tail was encouragingly small at just two basis points, analysts said.

"That was a much better result than we've seen in recent auctions," Stephen Lewis, director of research on London Bond Broking told Reuters Financial Television.

"It suggests some quite heavy bidding for this particular piece of stock," Lewis added.

He said gilts had reached spreads over European counterparts which were enticing buyers back to the UK market. The 10-year gilt/Bund spread is 180 basis points.

Gilt traders in London agreed. "The spread over other European bond markets was perhaps the most attractive factor," one trader said. "The operation has been pretty successful."

The market had approached this auction with caution after recent auctions of 10-year gilts have been distinctly less successful.

The last sale of 10-year paper in December attracted cover of just 1.12 times and a yield tail of 11 basis points. And prior to that, in September last year, a 10-year gilt auction failed to attract full cover -- an unprecedented failure.

"There were some pretty bearish forecasts on the cover and tail before the auction and even some rumours of it not getting away," said David Coleman, chief economist at CIBC Wood Gundy.

But in spite of the hefty demand for the new paper gilt futures slid on the result, having leapt half-a-point shortly beforehand. The June future was trading at 106-13 by 1050 GMT, up 4/32 on the day, having gyrated between 106-01 and 106-19.

Coleman said the average accepted yield at the auction was 8.08 percent, above the current 8.00 percent yield on the benchmark 10-year gilt in the market.

"That was viewed as negative but the results were excellent. There's no reason at all to be selling gilts on this outcome," he said.

With the success of this auction, some analysts said the Bank of England might attempt to plough through as much of its 1996/97 bond issuance as possible early in the year, before general election jitters blight the market.-Reuter