The market sets the government's borrowing rate.

A week before the auction the Debt Management Office publishes the terms: which gilt, and how much, in nominal pounds. On the morning, bidding is open for an hour, usually from 9:00 to 10:00. Only gilt-edged market makers bid directly. Everyone else — a pension fund, an asset manager, an overseas central bank — bids through one of them, or not at all.

A conventional gilt, including a green gilt, is sold in a multiple-price auction. Bids are prices. The highest prices are filled first, and each successful bidder pays the price they themselves bid. Non-competitive bids, which do not name a price, pay the average accepted price. An index-linked auction is different: one price for everyone, the lowest price the DMO accepts.

Two numbers describe the morning. The cover is how much was bid, divided by how much was for sale. The tail is the gap between the average accepted price and the lowest price the DMO was still willing to take, usually quoted as a yield. A long tail means the last bids were cheap: the market would only finish the auction at a noticeably higher yield.

Successful bidders then have a short window, the same afternoon, to buy up to a further 25% of what they were allotted, at that average price. This is the post-auction option. It is not offered on green gilts. Settlement is the next day.

Auctions are the main pipe, not the only one. A syndication is a larger sale, built by a group of banks taking orders in a book, and it is how the longest conventionals and a good part of the index-linked supply are sold. A tender is smaller, often an older gilt rather than the current benchmark, and it has no option to buy more afterwards.

The Debt Management Office chooses the gilt and the size. It does not choose the yield. The yield is the one implied by the prices investors bid. Just before 10:00 that gilt already has a price in the secondary market, and that price is a point on the yield curve, at that bond's remaining maturity. A new ten-year is sold against the ten-year part of the curve. A new five-year is sold against the five-year part. The same five-year point is what a five-year fixed mortgage is priced from, which is why an auction and a mortgage lender are reading the same number.

If the bids are comfortable, the average accepted yield lands on top of that secondary-market yield, or a hair cheaper for the buyer. If the bids are not there, the DMO has to accept lower prices, which means a higher yield. That higher yield is the government's borrowing rate for that slug of debt, and by the afternoon it is part of the curve everyone else looks at. The next company bond, and the next fixed mortgage of that length, are priced off a curve that now includes it.