Funding plans for bailout revealed

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The scale of the task of funding the Government's bailout of the major banks became clear yesterday with the release of further details of the Government's revised programme of gilt sales.

The Debt Management Office revealed the Treasury planned to issue £30bn worth of gilts and £7bn worth of Treasury bills to facilitate the purchase of £37bn worth of shares in Royal Bank of Scotland, HBOS and Lloyds TSB. Total issuance will now rise to £110bn through 2009.

The Treasury will sell £21bn of short-dated notes, £7bn of medium-term securities, £1bn of long-dated gilts and £1bn of inflation-linked bonds. The DMO said it would hold seven extra gilt sales before year end, with the first additional auction taking place on 21 October.

Gilt prices fell yesterday in anticipation of the substantial increase in supply from the new issuance programme, with market yields rising commensurately, a potential complication to the Bank of England's medium-term strategy of cutting interest rates.

Two-year gilts fell for a second day running, sending the yield 19 basis points higher to 3.90 per cent. The 5 per cent paper due in June 2010 slid 0.31 percentage points to 101.35. The yield on the 10-year note rose 7 basis points to 4.73 per cent.

"All countries, including the UK, eurozone countries and the US, are going to have to do significantly more issuance this year," said Padhraic Garvey, head of investment-grade debt strategy at ING Bank. "I can't see supply having a very strong effect as we still have recession risks into next year."

Around two-thirds of all gilts are held by insurance companies and pension funds, and their appetite for them has risen recently. Nevertheless, the new issues represent a large increase in supply, and more could follow.