LONDON, Jan 25 (Reuters) - 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 consultation.
“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 Managers.
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 said.
Index-linked gilts usually account for between a fifth and a quarter of all annual gilt issuance.