UK unveils world's longest-dated inflation-linked bond

27 October 2011

The UK's Debt Management Office (DMO) has launched what it believes to be the longest-dated sovereign inflation-linked bond in the world.

On 25 October, it unveiled a £4.5 billion tranche of gilts dated 2062, priced at £94.869 per £100 and paying a gross yield of 0.49%.

The gilt is linked to the Retail Prices Index (RPI), which means the capital value and coupon value will be uprated in line with inflation. The first coupon of this bond will be paid on 22 March 2012, with the coupon value set some months before that.

In just 30 minutes, investors had snapped up £3.5 billion worth of the gilts, and the offer closed early just an hour and a half after opening, with the sales of the gilt totalling £9.8 billion.

Amid ongoing market volatility and high inflation, UK investors bought up around 99% of the allocation.

The transaction was the fifth of the 2011-12 gilt offerings announced in the 2011 Budget, which planned to raise £31.6 billion.

So far, the government has raised £21.2 billion from the gilt offerings to date in 2011-12.

Strength of the market

Robert Stheeman, chief executive of the DMO, says he believes the new gilt is the longest-dated sovereign inflation-linked bond in the world. "It has extended the UK real yield curve by almost seven years and represents the largest ever sale of duration to the gilt market,' he says.

He adds: "It is a testament to the strength of the gilt market and our investor base that we were able to build a very large book of high quality demand of £10 billion in 90 minutes and at a time of persisting global market volatility.

"The deal also represents good value for the taxpayer, with the real yield at the sale being the lowest at which the DMO has sold an ultra-long index-linked gilt."

Adrian Lowcock, senior investment adviser at broker BestInvest, outlines how retail investors can invest in gilts.

"Private investors can purchase the gilt through either a stockbroker, a high street bank or Computershare investor services, who run the DMO's Gilt Purchase and Sale Service, and are also responsible for maintaining the register of gilt holdings."

He adds that retail investors should speak to a financial adviser before investing in gilts. "Generally gilts do not look attractive at the moment as the interest offered on them is very low, so it would be worth considering alternative investments such as corporate bond funds where the managers can actively invest in a wider range of debt in issue," he adds.

Dean Aitchison, senior investment manager at Fiducia Wealth, says there has been a "marked increase" in demand for index-linked bonds as investors pile into products that beat inflation, but this, he says, has forced yields to historic lows.

"The Bank of England expects inflation to fall sharply early next year, so one must ask if now is actually a good time to purchase index linkers, particularly long-dated issues. Long-dated bonds are generally more volatile than short-dated ones, and the 2055 dated bond was more volatile than the FTSE 100 over the past six years (a period covering historically large losses from equities)," he says.

Aitchison adds that the most appropriate way for retail investors to gain exposure to bonds is via a well diversified fund.

"If investors can find a long-dated index-linked gilt fund this could be the best way to access this issuance," he says. "Retail investors should be able to purchase stock via a wrap platform or through a broker when stock becomes available."

Gilt yields are currently at all-time lows. During the ongoing market volatility, prices for bonds have gone up as investors piled into safe haven assets. The redemption yield on a 10-year gilt is 2.39%, while a six-year gilt has a yield of 1.59%.

This article was written for our sister website Money Observer

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