U.S. Markets

UK draws record demand for inflation-linked bond

LONDON (Reuters) - British 10-year index-linked bonds attracted record demand at a government auction on Wednesday, adding to signs of concern that inflation might rise faster than expected.

FILE PHOTO: Pound banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

Investors submitted 2.832 billion pounds ($3.93 billion) of bids for the 800 million pounds on offer of an index-linked bond maturing in August 2031.

That gave a bid-to-cover ratio of 3.54, the highest for any index-linked bonds since such auctions began in 1998.

Inflation worries have played a big role in the sell-off of U.S. Treasuries this year, with a knock-on impact for conventional gilts, which suffered their biggest monthly drop since October 2016 in February.

British index-linked bonds pay a return linked to the retail prices index of inflation, and the 2031 bond sold with a real yield of -2.595%, giving investors an annual return 2.595 percentage points below the prevailing rate of RPI.

Annual RPI was 1.6% in January, and the 10-year index-linked gilts price in an average RPI rate of just under 3.4%, their highest since late 2019 and up from just over 3.0% at the start of the year.

The Bank of England targets the consumer prices index measure of inflation, which currently stands at 0.7% but which the BoE and most economists expect to rise close to its 2% target by the end of the year if not sooner.

“Outright commodity price rises and base effects should push up meaningfully on the energy inflation component of the CPI in the coming months,” Nomura economists wrote in a note to clients.

BoE Chief Economist Andy Haldane warned against complacency last month, likening inflation to a tiger on the prowl.

Wednesday’s auction was Britain’s penultimate sale of inflation-linked bonds this financial year, when the United Kingdom Debt Management Office is on course to sell more than 33 billion pounds of index-linked debt, 7% of its total issuance.

During the 12 months starting in April, the DMO plans to sell a similar volume.

($1 = 0.7206 pounds)

Reporting by David Milliken; Editing by Hugh Lawson