Brexit Flare-Up Is Seen Spurring Demand for U.K.’s Bond Offering

(Bloomberg) — It’s looking good for the U.K.’s first bond sale through banks since June, not least because of the latest saga in trade talks between the nation and European Union.

This week’s offering of 15-year debt should attract investors seeking safety in sovereign securities amid concern Britain is headed for a no-deal Brexit, according to ING Bank NV. The prospect of increased bond buying by the Bank of England by year-end should also spur demand, said Antoine Bouvet, senior rates strategist at the bank.

Benchmark U.K. gilts gained Monday following a report suggesting Prime Minister Boris Johnson’s administration is preparing to end the Brexit transition period without an economic agreement with the EU. Last week, BOE Deputy Governor Dave Ramsden told lawmakers that the central bank has the capacity to increase the pace and size if needed.

“On the one hand, the last BOE meeting boosted market hopes of another round of quantitative easing and seemed to downplay the odds of negative rates,” Bouvet said. “On the other, the approaching Brexit deadline and trash talking ahead of the next round of negotiations is dampening risk appetite,” prompting investors to favor safer assets, he said.

Record Borrowing

Such conditions look set to spur a narrowing of the yield premium on longer-maturity gilts over shorter-dated ones — and that prospect should support demand at the planned issuance, he added. The sale may be held as early as Tuesday. Barclays (LON:BARC) Plc estimates the sale size at 4 billion pounds ($5.3 billion).

The offering is the first to be arranged by banks since a 30-year bond was sold in June. A similar syndication of 10-year notes in May attracted record orders in excess of 82 billion pounds. They’re part of the U.K.’s plan to sell an unprecedented 385 billion pounds of debt this financial year to fund a surge in fiscal spending to counter the economic shock from the coronavirus.

Syndications have been an increasingly popular way to issue debt this year as governments ramp up borrowing to fight the pandemic, as the method allows larger-than-usual amounts to be raised. Banks involved in the deal agree to underwrite the offering in return for fees, avoiding the embarrassing possibility of failing to find sufficient demand.

The U.K.’s Debt Management Office said the securities on offer this week will have a 0.625% coupon and mature in July 2035. That compares with a yield of 0.51% for 15-year notes in the secondary market.