(Adds Treasury and more analyst reaction, context)
By David Milliken
LONDON, March 25 (Reuters) - Britain suffered its first failed government bond auction since 2002 on Wednesday after bids fell more than 100 million pounds short of the 1.75 billion the government was trying to raise, causing gilt prices to tumble.
Market strategists said the result did not suggest Britain was facing an incipient funding crisis as it prepares to issue a record amount of gilts this year and next to fund extra spending through the recession.
Instead, they blamed opaque Bank of England gilt-buying plans for the fact the UK Debt Management Office could not find enough bidders for the 2049 gilt at an auction where there would usually be heavy demand from pension funds and insurers.
"There's a state of confusion in the market at the moment. It requires greater clarity from the BoE on what its aims are," said Sean Maloney, strategist at Nomura International.
BoE Governor Mervyn King said on Tuesday the central bank could scale back its gilt purchases if they rapidly boosted the economy. This caused gilt futures to fall by their most in nearly a month as investors worried the BoE might not buy the 75 billion pounds of assets they had expected in the next 3 months.
"The commentary that's been emerging over the last couple of days has been enough to leave auctions a little exposed, especially ones like these that aren't bought by the BoE," said Maloney.
The BoE currently only buys 5-25 year gilts in its asset purchase scheme, which started this month and aims to boost the money supply and plug the spending gap caused by the recession.
Investors also took fright at an apparent lack of consultation between the BoE and the DMO after the BoE cancelled plans to buy a 2015 gilt on Wednesday after the DMO said at short notice it would sell more of that issue next week.
The DMO said after the auction that the 2049 gilt was the riskiest part of the curve, and investors' shortage of funds at the end of the financial year might also have hurt demand.
Britain's last failed auction, in 2002, was for an index-linked gilt, and Wednesday's failure was the first since 1995 for a conventional gilt.
Germany suffered a failed auction in January for a 10-year
Bund
TREASURY RELAXED
Britain's finance ministry denied the auction's failure reflected any wider difficulty in funding the country's ballooning budget deficit, which is expected to require record gilt issuance this year and next.
"It would be wrong to read anything into the results of one auction event, which depends on the gilt on offer, demand and market conditions on the day," a Treasury spokesman said, citing recent comments from the head of the DMO.
"Demand for gilts clearly remains strong, and the small shortfall in funding today can be made good in future auctions," he added.
Investors bid to buy only 1.627 billion pounds of the 2049 gilt for a cover ratio of 0.93 times, in contrast to the last time the 2049 gilts was sold on Dec. 2, when there were more than twice as many bids than there were gilts for sale.
The June gilt future
The yield on the 2049 gilt itself
Moyeen Islam, a gilt strategist at Barclays Capital, backed the Treasury's view that the auction did not suggest Britain could face a major funding problem -- a concern voiced by opposition politicians.
"This is a poor result, but the bond itself isn't a poor bond. It's cheap and has attractive metrics. This is as much a reflection of market's ability to absorb risk as it is the ability of the government to sell gilts," he said. * For a table of the auction result, see [ID:nLAC003193] (Additional reporting by Christina Fincher and Sumeet Desai, editing by Chris Pizzey)