The UK government’s new £5bn inflation-linked bond maturing in 2058 was flooded by a record-breaking £14bn of orders, allowing the debt management office to price it at a negative yield, FastFT reports.
The “linker” bond pays a coupon of 0.125 per cent, but demand was strong enough for the banks on the deal – Deutsche Bank, Goldman Sachs, Morgan Stanley and RBS – to price it at a negative “real” yield of minus 0.073 per cent.
In practice, that means that investors are willing to pay a small fee to the government in return for being compensated for inflation, for the first time ever in a gilt syndication according to Jo Whelan, the deputy chief executive of the DMO:
“Today’s sale has been notable for the end investor interest it attracted. Market feedback ahead of the deal had been supportive of a new 2058 maturity and this interest from our core domestic investor base did indeed materialise very strongly this morning.
“Consequently today’s was the largest index-linked gilt syndication order book yet - over £14 billion - and with this very strong support from the market we are pleased to have been able to launch the new gilt in substantial size and at a negative real yield for the first time in a DMO index-linked gilt syndication.”
The bond return is linked to the UK’s retail price index, currently at 2.8 per cent. But the 30-year “breakeven” rate - the difference between normal and linker gilt yields – indicates that investors expect RPI to average about 3.3 per cent over time.
For a large number of pension funds, which can be relatively agnostic on returns but have long-term liabilities, that means that any linker sales are attractive, says Sam Hill of RBC Capital Markets.
“A large part of the demand comes from pension funds where returns aren’t the only consideration. Their incentives are fairly skewed towards minimising risks, and inflation is a big part of that.”
