The UK is to issue £500 million more in index-linked gilts this year, following a record level of demand for its latest issuance.
The UK’s Debt Management Office (DMO) attracted £14.5 billion of demand for a long-dated index-linked gilt at an auction this week, almost three times as much as it was seeking to raise. This was despite the bond having the lowest recorded real yield for a “linker”, at -0.053%.
Linkers are a key tool within liability-driven investing strategies as they can help match liabilities while keeping pace with inflation.
Ritesh Bamania, senior consultant in Mercer’s financial strategy group, said there was no indication that the assets would get significantly cheaper in the future.
In a statement accompanying the issuance, the DMO said it would increase its planned index-linked issuance for the 2014-15 financial year by £500 million to £9 billion. It also plans to issue £9 billion in conventional government bonds.
Bamania said: “There is always a case for lobbying for more long-dated index-linked gilts, but a few months ago the government said it would be cutting back on issuance. That may be one of the things keeping yields so low.”
Lucy Barron, senior solutions manager in AXA Investment Management’s UK liability-driven investing team, said the imbalance between supply and demand was “unlikely to be eased any time soon”, as there are roughly £400 billion of linkers in issue versus demand in excess of £1 trillion.
Bamania said institutional investors were weighing up other asset classes with inflation protection characteristics to fill the gap, including property and infrastructure.
“There are new quasi-property funds with RPI-linked rental increases, but these bring illiquidity with them,” he said.
But he added that index-linked gilts would still have a key role to play regardless of high prices. “Our clients are not just looking at price. It’s all about controlling risk, and the timeframe of the investment,” he said.
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