LONDON Jan 25 Bond dealers and investors have
urged Britain to issue more inflation-linked gilts, two weeks
after the relevant inflation measure was spared changes that
could have cut future returns to investors.
Minutes published on Friday of the annual consultation
meeting between Britain's Debt Management Office, the finance
ministry and gilt market-makers and investors also noted some
demand for gilts linked to the consumer price index (CPI) rather
than the retail price index (RPI).
Earlier this month, Britain's top statistician unexpectedly
rejected major changes to the RPI measure used to calculate
returns on inflation-linked gilts that could have significantly
reduced the reported rate of inflation.
The move came after months of discussions on possible
changes by the Consumer Price Advisory Committee (CPAC) - which
has members from the Office for National Statistics, Bank of
England, finance ministry, media and academia - and a public
"There seems to be a view that there will be a pick-up in
demand for inflation-linked paper now that we have got the CPAC
consultation out of the way," said Barclays fixed-income
strategist Moyeen Islam.
The DMO will announce issuance plans in March for Britain's
2013-2014 financial year, which begins in April, and then revise
them towards the end of 2013.
The decision to keep the RPI intact - which means it will
continue to run substantially higher than the
internationally-comparable CPI - has also boosted appetite for
CPI-linked gilts among some investors such as AXA Investment
Its clients include British pension funds, which are among
the main buyers of long-dated index-linked gilts.
"Almost all UK pension schemes now have a significant
proportion of pension increases linked to CPI," said Lucy
Barron, a strategist at AXA.
"As these pension schemes look to further reduce risk
between their assets and their liabilities, then any inflation
mismatch becomes increasingly important," she added.
Barclays' Islam said demand for index-linked gilts should
also be supported by signs on Friday of a delay to possible
changes to pension rules that would reduce the need for
employers to hold ultra-long gilts to meet pension obligations.
The government announced a 'call for evidence' on changes,
rather than launching a formal consultation.
"(This) implies less risk of regulatory change than the
announcement of the intention to consult in December," Islam
Index-linked gilts usually account for between a fifth and a
quarter of all annual gilt issuance.