U.K. DMO Says Investors Want More Inflation Bonds in 2013-14Anchalee Worrachate
Investors and traders in U.K. government bonds called for an increase in the supply of inflation-linked securities in the next fiscal year, the Debt Management Office said.
Index-linked gilts outperformed nominal securities after the statement, widening the 10-year yield spread, the so-called break-even rate, to the most in 19 months. Primary dealers, who trade directly with the debt office, also said that for sales of so-called super-long gilts, demand may be greater for debt tied to inflation than conventional securities.
“It was suggested that the government should look to increase the overall supply of index-linked gilts in the 2013-2014 remit relative to conventional issuance, reflecting anticipated stronger demand for longer-dated index-linked gilts in the coming financial year,” the London-based debt office said in a statement today. The office, which raises cash from gilt sales for the government, held meetings with investors and primary dealers yesterday to seek their views on bond sales in the fiscal year starting in April.
U.K. inflation-linked bonds accounted for 23 percent of outstanding gilts at the end of September, or 290 billion pounds ($458 billion), according to Debt Management Office data. The securities allow retirement savings to keep pace with inflation because the principal and coupon payments are adjusted for rising prices.
The 10-year break-even rate widened five basis points, or 0.05 percentage point, after the announcement to 3.15 percentage points, the highest since June 2011.
Some investors also said the government should consider selling bonds linked to consumer-price inflation, according to the minutes of the meeting.
U.K. inflation-protected securities are currently linked to the retail-price index, which has been higher on average than its consumer-price equivalent in the past two decades. CPI excludes items such as local taxes and mortgage costs in its calculation, while these are included in RPI.
The government consulted market participants about the possibility of issuing bonds with payouts 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.
Axa Investment Managers, which oversees the equivalent of $382 billion, said two days ago that there is demand for CPI-tracking gilts because “almost all” U.K. pension plans now have a proportion of their payments linked to consumer-price increases, and they need such securities to match their assets and liabilities.
Most investors said any demand for so-called super-long gilts would be in the 50-60 year area, according to the minutes. The longest-maturity nominal gilts are due in January 2060.
Primary dealers also advocated an increase in issuance of medium-maturity gilts, or those due within seven and 15 years, to “maintain liquidity in this part of the yield curve.”
The debt agency estimates that the so-called debt financing requirement for the next fiscal year will be 161 billion pounds, including gilt redemptions forecast at 52 billion pounds. The planned gilt issuance for the fiscal 2013-2014 will be published alongside the government budget on March 20, it said.
The Debt Management Office is expected to sell 164.2 billion pounds of gilts this year, the lowest amount since fiscal 2009.