* Thirty-year gilts suffer biggest fall in over 4 weeks
* Pension changes likely to reduce demand for annuities
* Pensioner bond brings unexpected cut in gilt issuance
* Lower issuance helps short-dated gilts outperform Bunds
By David Milliken
LONDON, March 19 Long-dated British government
bonds tumbled on Wednesday after finance minister George Osborne
said older people would no longer have to invest pension savings
into annuities that provide an income for life.
Thirty-year bonds suffered their sharpest
one-day fall in more than four weeks, pushing their yield up by
4 basis points on the day to a six-day high above 3.49 percent.
Long-dated bonds are frequently bought by insurers who sell
annuities to the public, as the regular interest matches up with
the payments that insurers make as part of the annuity.
Shorter-dated government bonds fell less, as the amount of
government bonds being issued in the next financial year was
forecast to be more than 20 billion pounds below what the market
had expected at 128.4 billion pounds ($213.5 billion).
The reason for this is not an unexpected improvement in
Britain's budget deficit - which will remain one of the largest
in Europe at 5.5 percent of GDP next year - but another
government measure to tap pensioners for savings.
Later this year the government will allow pensioners to
invest up to 10,000 pounds each in retail bonds paying interest
of 4 percent over three years or 2.8 percent over a year.
By contrast, the government can currently raise money from
the markets at a cost of just 1 percent over three years
, and the current Bank of England rate is 0.5 percent.
The government will also increase the amount of money that
individuals can invest in premium bonds by 10,000 pounds.
Robert Stheeman, chief executive of the UK Debt Management
Office, told Reuters that these two measures alone reduced the
amount Britain needed to raise via gilts by 13 billion pounds.
The lower gilt issuance caused 10-year gilts to
pare losses caused by a sharp fall in German Bund prices earlier
in the day, although yields still finished the day 2 basis
points higher at 2.70 percent.
The gilt's spread over 10-year Bunds tightened 2
basis points on the day to its lowest since March 4 at 108.9
basis points - a sharp contrast to the 30-year gilt, which
underperformed versus German debt.
Marc Ostwald, fixed income strategist at Monument
Securities, said Wednesday's changes were likely to cause
long-term damage to demand for longer-dated bonds, as they both
reduced the requirement on Britons to make long-term investments
and increased short-term investment returns.
"The full impact will only be felt over months and years,"
he said. "It could become one of those horrible attritional
Ostwald also said the move went against the government's
strategy of locking in very low long-term interest rates by
selling more long-dated gilts.
But Sam Hill, a strategist at Royal Bank of Canada, was more
positive, saying that other potential changes - such as allowing
workers with final-salary pension schemes to take a cash pot
instead - could create a new source of demand for annuities and
"By giving defined benefit (pension) scheme members the
opportunity to switch to defined contribution schemes, the stock
of assets held by those schemes could lead to more significant
impacts on financial markets," he wrote in a note to clients.
* June long gilt future 109.85 (-0.12)
* June 2014 short sterling 99.455 (-0.005)
* March 2015 short sterling 99.10 (-0.010)
* 10-year yield 2.70 percent (+2 bps)
-------------------KEY MARKET DATA---------------------------
Long Gilt futures <0#FLG:> Gilt benchmark chain
Short Stg futures <0#FSS:> Cash market quotes
Deposit rates Sterling cross rates
UK debt speedguide
-------------------KEY MARKET REPORTS--------------------------
Euro Debt Dollar
U.S. Treasuries Debt reports
--------------------GILT STRIPS DATA -------------------------
Gilt strips data All gilt strips
Gilt strips IO Gilt strips PO
A list of all the strippable British gilts
($1 = 0.6014 British Pounds)
(Editing by Alison Williams and Susan Fenton)