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UK sells new 50-year inflation-linked bond with record-low yield

UK sells new 50-year inflation-linked bond with record-low yield
UK sells new 50-year inflation-linked bond with record-low yield   -   Copyright  Thomson Reuters 2021   -  
By Reuters

<div> <p>By David Milliken</p> <p><span class="caps">LONDON</span> -Britain sold 1.1 billion pounds ($1.47 billion) of a new index-linked gilt maturing in 2073 on Tuesday, which will pay investors a record-low inflation-adjusted yield for a bond sold via a syndication.</p> <p>The nominal value sold was the lowest of any gilt syndication since at least 2005, after the country scaled back its 2021/22 issuance plans last month. The amount raised was around 3.9 billion pounds as investors bought the gilt above its par value.</p> <p>Robert Stheeman, chief executive of the <span class="caps">DMO</span>, said the new bond represented Britain’s longest maturity gilt.</p> <p>“The issuance event represented a significant amount of risk for the market to absorb but I am delighted that the transaction was very smoothly executed against what has been a volatile market backdrop over recent weeks,” he said.</p> <p>Demand for index-linked gilts is generally high due to appetite from British pension funds and insurers who need to hold the debt to match long-term inflation-linked liabilities such as future pension payments.</p> <p>Index-linked debt has drawn greater demand in recent months due to a surge in inflation that has pushed down inflation-adjusted yields to record lows. </p> <p>Retail price inflation, which is used as the basis for British index-linked gilts, jumped to a 30-year high of 6.0% last month, and typically runs around a percentage point above the consumer price inflation targeted by the Bank of England. </p> <p>The transaction attracted more than 17.5 billion pounds of orders, and sold at a real yield of -2.3883%, meaning investors will receive a return 2.3883 percentage points below the prevailing rate of retail price inflation.</p> <p>This is the lowest real yield of any index-linked gilt sold via syndication and 3.5 basis points below the current yield of the benchmark March 2068 index-linked gilt.</p> <p>A regular auction of 10-year index-linked bonds earlier this month had a record-low real yield of -3.242%. </p> <p>Britain’s Office for Budget Responsibility cut its cash borrowing forecasts for 2021/22 by 83 billion pounds last month, prompting the Debt Management Office to reduce gilt sales for the remainder of the financial year by 58 billion pounds.</p> <p>The volume of gilts sold on Tuesday was far below the record 12 billion pounds sold at a syndication of a 10-year conventional gilt in May 2020, when Britain was rushing to raise funds at the start of the <span class="caps">COVID</span>-19 pandemic.</p> <p>The new index-linked gilt has a coupon of 0.125% and will mature in March 2073, making it the longest-dated index-linked gilt in issue. The March 2068 index-linked gilt had a longer maturity when it was first issued in 2013.</p> <p>($1 = 0.7477 pounds)</p> </div>