20 Billion Pounds of Linker Orders? Don’t Panic

(Bloomberg Opinion) -- An order book exceeding 20 billion pounds ($26.5 billion) for Wednesday’s new 2041 inflation-linked gilt sale is quite eye-catching, given that the U.K. Debt Management Office only issued 3.25 billion pounds.

It’s tempting to read into this some flight-to-quality over Brexit, or even a whiff of panic about rising inflation. But really, it’s just the age-old story of liability-driven investors, such as pension funds and life insurers, looking to match their long-dated commitments to plan holders by securing assets with similar maturities — a conventional 53-year bond issued May was also six times oversubscribed. 

These real-money buyers had requested a 23-year maturity, and they were allocated two-thirds of the deal. The DMO gave them what they wanted — it likes its securities to mostly be in the hands of these buyers — so it shouldn’t be all that surprising that demand was so fantastic. The fact it has an in-built inflation hedge is even better.

The security priced at a negative 1.62 percent yield. Combine that with the 0.125 percent coupon, and the real return the bond buyer earns depends on how much the Retail Price Index is above 1.5 percent. The 1.5 basis points premium to the existing 2040 benchmark is a tiny scrap for an extra year’s duration.

20 Billion Pounds of Linker Orders? Don’t Panic

It may not be rich pickings, but it is at least the best credit available. However much political turmoil the U.K. government finds itself in, it still doesn’t need to offer much of a new issue premium.

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