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Demand for U.K. Inflation Debt ‘Very Good,’ Stheeman Says

Debt Management Office Chief Executive Robert Stheeman
Debt Management Office Chief Executive Robert Stheeman said, “Last week’s auction indicates one thing and that is there is fundamentally still very good underlying demand for inflation-linked gilts.” Photographer: Simon Dawson/Bloomberg

Oct. 17 (Bloomberg) -- Demand for U.K. index-linked gilts is “very good” even as the Statistics Authority considers changing how retail-price inflation is calculated, according to Debt Management Office Chief Executive Robert Stheeman.

Inflation-linked bonds, which pay investors based on changes in the retail-price index, have handed investors a loss of 4.2 percent this year, while conventional gilts returned 2.2 percent, according to indexes compiled by Bank of America Merrill Lynch. Investors bid for 2.6 times the amount sold when the U.K. auctioned 1.5 billion pounds ($2.42 billion) of so-called linkers on Oct. 11.

“Last week’s auction indicates one thing and that is there is fundamentally still very good underlying demand for inflation-linked gilts,” Stheeman said in an interview on Bloomberg Television’s “The Pulse” with Guy Johnson in London. “A fair bit of any possible changes, were they to be implemented, have already been discounted in the market.”

The Bank of England sets its benchmark interest rate based on consumer-price inflation, which has been lower than retail-price inflation on average for the past two decades. The Consumer Prices Advisory Committee said Sept. 18 there is “sufficient evidence to consider change” to inflation calculations and it’s examining any “unjustifiable” gap between the two measures.

Consultation Document

The National Statistician published a consultation document on Oct. 8 and responses are due by Nov. 30. The Consumer Prices Advisory Committee advises the Statistics Authority on potential changes to the inflation measures.

“Absolutely nothing has been decided yet,” Stheeman said. “This is not driven by government, not by ministers, but by the independent Statistics Authority, which enjoys statutory independence, and which has a mandate to produce the best quality statistics for the country.”

Changing how inflation is measured may endanger the U.K.’s safe-haven status, Michael Amey, a portfolio manager at Pacific Investment Management Co. in London, said last month. from the National Statistician are due by Nov. 30.

The U.K. gilt market may remain resilient even if the Bank of England pauses its bond-purchase program when its current round of so-called quantitative easing ends in November, Stheeman said.

“My suspicion is that is may not change a huge amount,” he said. “Don’t forget we have been here before. The bank has paused QE previously back in 2010. The market took all that very much in its stride.”

Pension Funds

Demand for inflation-linked securities from pension funds has been one of the reasons the Debt Management Office has been boosting sales of the securities, Stheeman said.

“We’ve increased the issuance of inflation-linked debt over the last few years dramatically in absolute terms, certainly in percentage terms the highest we have ever done,” he said. “We are very conscious of that demand. It is providing good cost-effective funding for the U.K.”

The 30-year break-even rate, the difference in yield between conventional and index-linked bonds, widened three basis points, or 0.03 percentage point, to 2.9 percentage points at 3:10 p.m. in London after shrinking to 2.75 percentage points on Sept. 27, the narrowest since 2003.

To contact the reporter on this story: Lucy Meakin in London at

To contact the editor responsible for this story: Paul Dobson at

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