U.K. gilt auction bombs; bonds sell off

There's some interesting action (if you'll pardon the pun) over in the U.K. bond market this morning. The government tried to auction off 1.75 billion pounds of 40-year gilts this morning. But demand was extremely weak, with investors only bidding for 1.63 billion pounds.

The failed auction comes as the U.K. government is selling massive amounts of debt to fund bailouts and stimulus packages -- efforts that could drive the U.K.'s deficit to as much as 11% of GDP by 2010. And of course, the Bank of England recently said it would buy as much as 75 billion pounds in both corporate and government bonds there, essentially monetizing the country's debt.

Ten-year gilt yields surged as much as 20 basis points from low to high before paring about half the move. We have seen spillover selling in U.S. bonds as a result, with the long bond futures down 1 7/32 as I write.