Investors snap up inflation-proof gilt at record negative yield

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Investors have snapped up a long-dated indexed gilt at a record low negative yield today, underscoring market demand for some protection against rising inflation in the UK economy.

Britain’s Debt Management Office sold a £2bn tranche of an inflation-protected gilt maturing in 2065 at an average yield of -1.535 per cent – a record low for the asset class.

The indexed bond is the second longest maturity gilt issued by the DMO, with the yield outstripping that on a 2068 “linker” sold at a yield of -1.077 per cent before the Brexit vote in March. Today’s sale was priced 0.25 basis points below the yield of an existing bond due to mature in 2062.

Demand for the debt was high, attracting £11.9bn in orders, reflecting how investors are seeking to protect themselves against rising inflation in the UK economy.

Britain’s inflation rate has surged in the wake of the Brexit vote, pushed up by a steep decline in the value of the pound. Rising consumer prices spell bad news for conventional bond investors, eating away at prospective returns.

Linkers however pay a coupon determined by the prevailing rate of retail price inflation in the UK.

The Bank of England expects consumer price inflation to hit its 2 per cent target this month, with price growth expected to hit to 2.9 per cent in 12 months’ time.

Domestic investors accounted for the bulk of the buyers at around 90 per cent, said the DMO.

Commenting on the gilt sale, Sir Robert Stheeman, chief executive of the DMO said:

I was again impressed by the continuing strength of demand from our core investor base and the capacity and smooth functioning of the gilt market seen today.

The result represents a very successful conclusion to our syndication programme in 2016-17 which has raised £33 billion.

Barclays, UBS, Natwest Markets and Lloyds Bank advised on the syndicated deal.

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