By Christopher Whittall and Jason Douglas 

Bumper demand for a multibillion pound sale of U.K. government debt issued on Tuesday and a sharp rally in sterling appeared to show that investors are more relaxed about Britain's June vote on its membership of the European Union.

The GBP4.75 billion ($6.9 billion) debt sale attracted GBP21 billion of orders, according to a notice released on Tuesday by banks underwriting the deal. The pound, meanwhile, rose around 0.8% to $1.46 against the dollar in late European trading, reaching its highest level against the greenback since early February.

The currency rallied as recent opinion polls showed the U.K. leaning toward a vote to stay in the EU and after President Barack Obama warned that exiting the bloc would hurt Britain's global standing, boosting the stay campaign.

Concern that a vote to leave the EU, the so-called Brexit, would hit the British economy has helped push the pound down around 1% against the dollar and around 5% against the euro this year.

Still, the exchange rate has been volatile, and analysts say further market gyrations could come ahead of the June 23 vote.

"As the odds of Brexit have fallen, sterling has outperformed," said Mike Riddell, a portfolio manager at Allianz Global Investors, who said the British pound has been the best performing currency in global markets over the past five days.

"I don't think that the gilt market was ever going to be where you see any kind of panic," he said.

Trading in government debt and the country's main equity market has been mainly unaffected by speculation over Brexit.

In Tuesday's sale, the government's financing arm, the U.K. Debt Management Office, doubled the size of an existing GBP4.75 billion bond issue that pays an interest rate of 2.5% and matures in 2065. The bonds were priced at a yield of 2.29%, according to the DMO. That was at the lower end of a range that bankers said the government would pay, and another sign of the deal's popularity.

Bond investors have been divided on what they believe will be the impact of the vote's outcome on gilts. Foreign investors sold gilts at the start of the year, but support has been strong from domestic investors. Domestic investors bought around 92% of Tuesday's debt sale, according to the DMO.

This year, U.K government bonds have moved alongside a global rally in sovereign debt as investors look for safety amid uncertainty over the global outlook. Rising prices have pushed the yield on 10-year gilts around 0.3 percentage points lower to 1.66% this year.

Tuesday's bond sale may also have benefited from bond investors' hunt for government debt that offers a positive yield. That is particularly true for U.K. pension funds, which need to hedge long-dated liabilities. Almost a third of investment-grade sovereign debt is now trading at a negative yield, according to Citigroup Inc.

Still, 10-year yields have ticked up from a recent low of 1.32% on April 7 as investors' concerns over the global economy ease. On Tuesday, the yield on the 10-year gilt rose 0.06 percentage point to 1.66%.

While investors are split on how gilts will react to a potential Brexit, the effects on the pound have been clearer cut.

Sterling hit a seven-year low against the dollar shortly after the date of the EU vote was announced in February.

"On the currency side it is pretty straightforward: if there is [going to be] a Brexit, sterling should go on [falling]," said Tanguy Le Saout, head of European fixed income at Pioneer Investments. "If it has a lower probability, sterling should come back some."

Investors expect trading in the pound will stay volatile ahead of the vote if the polls narrow. Despite Tuesday's gains, short-dated currency options to protect against a sharp move in the pound are at their most expensive since 2010.

Proponents of the U.K. staying in the EU say an exit would badly damage the U.K.'s economy by hitting its trading relationships with the rest of the world and making Britain a less attractive place for foreigners to invest in. Those calling for a Brexit, say that the U.K. economy will thrive freed of EU regulation, and that new trade agreements will be forged.

The gilt sale comes ahead of a report due Wednesday that is expected to show the U.K. economy lost momentum in the first quarter after growing in 2015 at the second-fastest pace among the Group of Seven leading economies after the U.S. A renewed manufacturing slump as well as uncertainty over the outcome of June's referendum are both weighing on growth, economists say.

Officials at the Bank of England, led by Gov. Mark Carney, have warned that the economy could slow further in the months ahead as doubts about Britain's future in Europe intensify. The BOE's rate-setting Monetary Policy Committee in April highlighted a range of potential vulnerabilities to referendum jitters, including hiring, business investment, real-estate transactions and consumer spending.

Citigroup Inc., Deutsche Bank AG, HSBC PLC and J.P. Morgan Chase& Co. underwrote the bond deal.

Write to Christopher Whittall at christopher.whittall@wsj.com and Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

April 26, 2016 13:28 ET (17:28 GMT)