Related News:
BlackRock Avoids Today's U.K. Indexed Bond Sale Amid Pension `Confusion'
BlackRock Inc., the world’s biggest asset manager, said it didn’t buy U.K. inflation-linked bonds at today’s sale amid “confusion” about the government’s planned changes to pension indexing.
The Debt Management Office raised 6 billion pounds ($9.3 billion) from selling a 30-year index-linked bond which banks sold at the low end of the planned yield range. The sale was the largest syndicated offering of an inflation-protected gilt, the debt agency said. Two weeks ago, a sale of inflation-linked notes garnered the lowest demand for that bond issue since 2008.
“I’m not involved in this deal,” Brian Weinstein, a New York-based fund manager at BlackRock, said after the sale. “But it’s is encouraging to see it go well.”
All U.K. inflation-linked debt is based on the retail price index, or RPI. The two-month-old Conservative-Liberal Democrat coalition announced that it would align state pensions to consumer price inflation, which has been lower than RPI on average during the past 20 years, and may ask private pensions to do the same. The U.K. has said it doesn’t have immediate plans to issue CPI-linked bonds, which could help pension-fund managers avoid a mismatch with their long-term liabilities.
Caution Before Clarity
“The market certainly doesn’t like uncertainty,” Weinstein said in an interview on July 23. “Do I think we will use this syndication to get more overweight? We don’t think so. I would want to be cautious until we get clarity.”
Today’s 0.625 percent 2040 index-linked bond was priced to yield 1.02 percent, or a yield spread of zero to the 1.125 percent index-linked gilt maturing in November 2037, according to the Debt Management Office. Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc and Royal Bank of Scotland Group Plc are managing the issue.
The debt agency said 99 percent of the demand at the syndicated offering today was from domestic investors including pension funds and insurance companies.
Weinstein, who last year described the U.K. inflation- linked bond market as “bizarre,” said he doesn’t manage liabilities for British pension funds, and trades index-linked bonds for his funds.
‘Confusing’ Issue
“The issue is still confusing because it’s not totally clear how much pension-fund assets will be switched from RPI to CPI,” Weinstein said. “Part of the reason why the U.K. is really cheap in line with the rest of the market is because of CPI and RPI confusion.”
The July 15 auction of an index-linked bond maturing in 2022 drew the lowest demand for the security since October 2008. Unlike the consumer price index, the retail price index includes such items as mortgage-interest payments and local taxes.
“I think the pension-fund community will still need RPI-” based bonds, Weinstein said. “They might need a small amount of CPI as well. But still, it’s good to have a nice, clean test. Deep down, I think the U.K. market will be just fine.”
Pension Minister Steve Webb said July 8 that the government intended to use the CPI as the key inflation measure for “the purposes of regulating occupational pension schemes,” as company pension plans are known in Britain. A spokeswoman for his department declined to comment further.
‘Overweight’
Prime Minister David Cameron’s government may save money as CPI has shown inflation to be an average 0.7 percentage point lower than RPI over the past 20 years, according to JPMorgan Chase & Co. Consumer prices, which the Bank of England monitors, rose 3.2 percent from a year earlier in June, while retail prices advanced 5 percent during the same period, according to Office for National Statistics data released on July 13.
BlackRock, which manages more than $3 trillion, still maintains its so-called “overweight” position on U.K. index- linked bonds, Weinstein said. This means his fund holds a greater percentage of the bonds than in the benchmark indexes he uses to measure performance.
Weinstein said he prefers British inflation-protected bonds to those of the U.S. and the euro region because the Bank of England is the central bank “most willing” to revive its economy through bond purchases, known as quantitative easing.
“The U.K. is a place where inflation is stickier than other places,” said Weinstein. “The Bank of England will undertake the QE program again if things get worse. That will boost inflation in the longer term. Inflation is not a near-term issue, but my view is that people are underestimating the long- term risk of inflation.”
U.K. inflation-linked bonds underperformed their U.S. and European peers this quarter. They handed investors a 2.75 percent loss compared with a decline of 0.98 percent from U.S. Treasury Inflation Protected Securities and a 1.31 loss from German index-linked debt, according to indexes compiled by Bank of America’s Merrill Lynch unit.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;
Rate These Stories
Rate this Page