UK - Chancellor Gordon Brown has laid down plans that "could" allow two-thirds of gilts issued in 2006/07 to be long-dated, easing the supply shortage for pension funds wanting to match their liabilities more closely.
In his 10th budget speech today Brown said: “In the next issue, long dated gilts will increase from just under half to up to two thirds, reflecting the benefits we now gain from long term stability.”
The DMO said it planned to raise £65bn in 2006/07 including £63bn in gilt sales and a £2bn increase in the stock of treasury bills. It claimed up to two thirds of issuance “could” be long dated but that would depend on allocations during the year.
The DMO confirmed £63bn would be short conventional, at least £10bn medium conventional and a minimum of £19.5bn long conventional in at least nine auctions. The remaining £7.5bn of gilts has yet to be specified through the remaining three quarters of 2006.
A spokesman for the DMO said: “To get it up to two thirds would require all the additional £7.5bn and virtually all the linked issuance to be long. Our remit is in response to market demand so we will shape issuance depending on [that demand].”
Kevin Wesbroom, senior consultant, Hewitt Associates said: “It looks like it has the potential to be a win win situation because the government would get a supply of cheap money to reduce public finances longer term and pension funds get some easement of the crisis because they will get better long term returns on government investment.”
Yields hit a low of 0.38% above the rate of inflation on the 50-year index linked bond in January this year.
“The low interest rates in the last couple of years have been crucifying pension funds,” Wesbroom said. “Throwing a lot of stuff at the market will sure to have a impact and be a welcome relief for pension funds.”
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