The U.K. sold 6 billion pounds ($9.3 billion) of 30-year inflation-linked securities at the low end of the planned yield range after government changes to pension-indexing rules failed to dissuade buyers.
The 0.625 percent 2040 index-linked bond, which was sold through a syndicate of banks today, 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. The bond was initially set to yield zero to two basis points more than the 27-year security, said a banker involved in the transaction.
The two-month-old Conservative-Liberal Democrat coalition last month said it will align state pensions to consumer price inflation, or CPI, instead of retail price inflation, or RPI. Analysts said the government would save money with the change. All inflation-linked British bonds are indexed to RPI. Demand at a non-syndicated offering of inflation-linked notes two weeks ago reached a two-year low for that issue amid speculation pension-fund managers were now avoiding the debt.
“U.K. inflation-linked bonds offer good value, and I’m not surprised that the sale went relatively well,” said John Stopford, head of fixed income at Investec Asset Management Ltd., which has $65 billion under management. “We don’t know what will happen to the proposed change in indexation, but demand to hedge inflation is there.” Stopford declined to say whether he participated in the sale.
The government has indicated it may ask company pension plans to follow suit in switching to CPI indexing. The U.K. has also 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. The U.K. will consult investors before any such CPI-linked debt is introduced, government spokesman Steve Whiting said on July 12.
Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc and Royal Bank of Scotland Group Plc managed today’s issue. The sale is part of 165 billion pounds of bonds the Treasury plans to issue in the fiscal year that will end in March. Of the total, 33.8 billion pounds will be in inflation-protected securities, the Debt Management Office’s data shows.
U.K. index-linked bonds returned 0.80 percent this year, compared with a gain of 5.04 percent from regular bonds, data compiled by Bank of America’s Merrill Lynch unit shows.
The 30-year breakeven rate, a gauge of inflation expectations derived from the yield difference between regular and index-linked bonds, was little changed from yesterday at 3.36 percentage points. That compares with 3.77 percentage points at the start of the year.
CPI vs. RPI
CPI has shown inflation to be an average 0.7 percentage point lower than RPI over the past 20 years, JPMorgan Chase & Co. says. 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 Inc. fund manager Brian Weinstein had earlier said he probably wouldn’t participate in today’s offering amid “confusion” about the changes to pension indexing.
“The market certainly doesn’t like uncertainty,” Weinstein, who is based in New York, said in an interview on July 23. “I would want to be cautious until we get clarity. Investors, including ourselves, would want to see how the syndication goes given the recent change.”
BlackRock, the world biggest asset manager, manages more than $3 trillion.