View from City Road: Reasons for a cool response

The Bank of England's pounds 2.5bn auction of a stock that will become the new five-year benchmark turned out a bit of a flop rather than the solid success everyone had expected.

Subscribed only 1.2 times, it was the least successful auction since January. The average yield was much as expected, but the 'tail' yield between the highest and lowest bids was as wide as two basis points. The disappointment lies in the fact that institutions have been saying for some weeks that they are keen on gilts.

Yesterday's auction was probably a temporary setback, however. Institutions, unlike retail buyers, prefer ten- to five-year stocks and seem to have decided to wait and see what maturity the December auction will bring. New fears about interest rates and the wish to see what the Treasury says about borrowing in next month's Budget contributed to the coolness of their response.