Gilt Auctions and Secondary Market Dynamics

This letter shows how changes in investor demand for United Kingdom government bonds, also called gilts, affect the shape of the yield curve. To clearly identify the impact of changes in investor demand, we analyse gilt auctions and find that surprises in investor demand, measured by deviations in the bid-to-cover ratio from its long-term average, persistently affect yields in particular at the long and short end of the curve and that this effect is more pronounced in volatile market conditions. Moreover, we show that demand shocks transmit across the yield curve, in particular to neighbouring bonds.