Demand drops for long term bonds

11 September 2007

Demand for 35-year UK bonds has dropped because investors believe the Bank of England is beginning to focus more on supporting financial markets, according to reports on Bloomberg.

The Debt Management Office sold $4.06 billion of 4.5 per cent bonds that mature in 2042 at an auction today, bids of 1.32 times the amount offered by securities.

Since the sub-prime crisis, there has been no sale of bonds over 15 years by any major economy due to concerns with market stability.

Speaking to Bloomberg, Ian Pizer, a portfolio manager at Standard Life in Edinburgh, said: "We are a bigger fan of short-dated bonds than longer-dated bonds at the moment. The Bank of England may eventually be forced to react to the problem in the money market."

Bonds with maturity of over 15 years have decreased in demand following the cut on its discount lending rates by the Fed.

According to Mr Pizer, the spread between the 10 and 30-year bonds will need to narrow to 45 basis points at least before investors are interested.

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