The UK has sold a 20-year inflation-linked bond for a record negative yield as investors seek protection against a surge in inflation following the Bank of England’s resumption of its bond-buying programme.

In its first auction since the BoE restarted QE, the UK’s Debt Management Office sold an £850m gilt at an average yield of -1.722 per cent on Thursday. The paper was over-subscribed 1.6 times, receiving bids worth £1.37m, reports Mehreen Khan.

A previous £900m 20-year indexed bond sold on June 9 – before the BoE stimulus announcement – produced a yield of -0.974 per cent. A negative yield means investors make a loss if the bond is held to maturity.

Inflation-linked securities protect bondholders from a future spike in consumer prices that would erode the real value of their returns.

Demand for the “linkers” suggest investors expect inflationary pressures to spark up in the UK on the back of a weaker pound and as monetary stimulus trickles its way into the domestic economy.

The BoE forecasts inflation will overshoot its 2 per cent target in 2018. Consumer prices are currently at 0.5 per cent, while market expectations for prices have soared to their highest level since June 2015 at 2.6 per cent (see chart above).

The auction comes as yields on non-inflation linked gilts have plumbed to record lows this week. Yields on the UK’s 10-year benchmark bond are at 0.535 per cent, with short-term paper maturing in March 2019 and March 2020 falling briefly negative yesterday as central bank interventions drive up prices.

Bonds have been on turbocharged rally as the BoE has dipped its toes back into the gilt market this week. But the QE programme hit an early snag on Tuesday as holders of long-term debt were reluctant to part with their bonds.

However, as Francesco Garzarelli at Goldman Sachs explains, the scarcity scares are probably overblown, as the QE programme should find no trouble in a market of over £200bn:

The pool of long-dated Gilts which the BoE can tap into is large. Consider that there are currently over £220bn (at market values as of 27 July) of government bonds outstanding with maturities above 15-years eligible for QE purchases.

The BoE has announced it will buy at most £20bn-worth of these securities, with the remainder spread over bonds with shorter maturities. An increase in government bond issuance resulting from a looser fiscal policy in coming quarters should mitigate the scarcity effects even further.

Chart courtesy of Bloomberg

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