Fears that the U.K. government might fail to find enough buyers for its bonds are rife this year, what with so many countries racing to raise cash to finance their deficits. But a bigger problem than a failed bond auction might be a successful one – one where Britain finds enough buyers but ends up paying them a painfully high interest rate.

For months, financial markets have tended to focus on the prospect of failed bond auctions, whether it’s fiscally challenged Greece, Portugal or Britain. Any failure, the logic goes, could spook investors across the globe by suggesting that a country is having trouble funding itself and making debt payments.

But a failed bond auction can also be a good thing in the longer-term if it means a sovereign borrower – say, the U.K. – is refusing to pay ridiculously high interest rates to investors that are – being investors – pushing for the highest possible yield.

A so-called “uncovered” auction is “not the most unhealthy thing in the world,” and can happen from time to time, says Philip Laing, investment director for government bonds at Standard Life, which manages some 130 billion pounds of assets. What may be more important, he says, is the “scale of the concession” the U.K. may end up making on a bad day if markets are too jittery.

On Tuesday, the U.K.’s debt managers are expected to sell three billion pounds of bonds that mature in 2022, with analysts expecting the sale to succeed. The last time a British bond auction failed was last March, when managers failed to collect enough bids at an auction of 1.75 billion pounds of 40-year bonds.

While finishing bond auctions is obviously a good thing, locking in excessively high interest rates on huge new debt obligations is bad. That is because it makes it harder for the U.K. to service its debt over the long-term. Higher interest payments, in turn, increase the size of Britain’s mountain of debt, and at time when its economy – and tax revenues – are weak.

Meantime, many analysts already expect Britain’s borrowing rates to rise further in coming weeks. That is because the U.K.’s central bank, the Bank of England, is no longer buying government bonds as part of its economic stimulus program. Jason Simpson, market strategist at Royal Bank of Scotland Group, for example, expects the yield on the benchmark 10-year U.K. government bond to hit 4.50% from today’s 4.08% by mid-year.

That is close to the average yield over the past decade, and not alarming. But, while sovereign debt fears have seemed to subside recently, another bout of jitters could hamper an upcoming British bond auction, jacking up borrowing rates and hurting Britain’s long-term finances.


         


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