FRANCE - The French government last week significantly expanded the worldwide market for inflation-indexed bonds by issuing the first true Euroland-based inflation-indexed bond.
Though the issuer and credit of this inflation-indexed bond is France, the bond has been issued in euros and will pay out based solely on the Euroland-wide harmonised Consumer Price Index inflation rate (excluding tobacco prices, due to the fact that tobacco prices are under government control).
According to US-based asset managers Bridgewater Associates, this is an important development in the growth of the inflation-indexed bond market as a global asset class since all prior inflation-indexed bond issues were tied solely to domestic consumer price indexes, and therefore tended to draw demand mostly from investors inside of France, Sweden, and the UK.
The new Euroland-based inflation-indexed bond issued by France today will draw demand from all across the 11 countries inside Euroland that until now had no domestic inflation-indexed bond market. Only about 27% of the new bond went to France-based investors.
Bridgewater said: The French government had hoped to issue a minimum of about EUR3 bn worth of the new bonds with a target of about EUR5bn. This was based on an expected real yield of about 3%. As it turned out, the French generated a book of demand for about EUR9.4bn worth of bonds at today’s initial sale, prompting the French Treasury to expand their target sale from EUR5bn up to EUR6.5bn at a real yield of 2.98%.
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