Axa Investment Says U.K. Should Auction CPI-Linked Gilts

The U.K. should sell government bonds with returns linked to the consumer-price index to meet the needs of long-term investors such as pension funds, according to Axa Investment Managers Ltd.

“There is now clear demand and drivers for the issuance of U.K. CPI-linked gilts,” Lucy Barron, a London-based strategist at the company that oversees $739 billion of assets, wrote in a note to clients. “We would anticipate the first CPI linkers to be issued in 2014/15 and this will in turn lead to a market in other CPI-linked instruments such as CPI swaps.”

Almost all U.K. pension plans now have a proportion of their pension payments linked to consumer-price increases, and that has boosted their demand for CPI-linked securities as they seek to match their assets and liabilities, Barron wrote.

U.K. inflation-protected securities are currently linked to the retail-price index, which has been higher than its consumer-price equivalent for the past two decades. CPI excludes items such as local taxes and mortgage costs in its calculation, while these are included in RPI. Index-linked bonds allow retirement savings to keep pace with inflation as the principal and coupon payments are adjust for rising prices.

U.K. consumer-price inflation was unchanged at an annual rate of 2.7 percent in December, the Office for National Statistics said Jan. 15. Retail-price inflation, a measure used in wage negotiations, accelerated to 3.1 percent from 3 percent.

Market Consultation

The government consulted market participants about the possibility of issuing bonds with payouts are linked to CPI and decided in 2011 it wouldn’t sell such bonds in the fiscal year that started in April 2012. It didn’t rule out future sales.

“At the Autumn statement 2011, the government said that its decision not to issue CPI-linked gilts in 2012-2013 did not preclude issuance in the medium term and that it would keep the case to issue the securities in the medium term under review,” Steve Whiting, a spokesman at the U.K. Debt Management Office in London wrote today in an e-mailed response to questions.

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