UK - The UK government's decision to issue 50-year bonds from May has received a mixed response from the investment industry.
As part of the 2005 Budget, handed down yesterday, Chancellor Gordon Brown announced the Debt Management Office (DMO) would begin issuing the long-dated securities.
Consultant Watson Wyatt lauded the move as a plus for the pensions industry.
“The move is positive for the UK pensions industry, as it adds transparency and liquidity to the ultra-long part of the Sterling bond market, an area until now dominated by swaps and a few supranational bonds,” Watson Wyatt said.
However Denis Gould, head of UK fixed income at AXA Investment Managers was less optimistic about the benefits for investors.
“For the future there is clearly demand for ultra long maturities, especially from liability driven investors,” he said. “However we think the current craze for 50 years may wane. In government bonds 50 year issues have the benefit of higher convexity which is worth something, but investors receive next to no extra yield for moving out to a rather isolated point on the curve where liquidity could be poor.”
The DMO’s remit for ultra-long stock includes both conventional and index-linked gilts.
The breakdown of issuance includes £18.5bn in long-dated gilts, £11.5bn in medium-dated gilts, £12.5bn in short-dated gilts, £11bn in inflation-linked bonds.
Helen Roberts, head of government bonds at F Asset Management said gross gilt sales of £53.5bn for 2005-06 announced by the DMO was higher than expected, with the long end of the gilt market taking the brunt of the extra issuance.
“The current yield drop of almost 0.2% between 30 years and 10 year gilts should correct to nearer flat as the market prices in a concession ahead of a 50 year bond in May,” she said.
“Pension and insurance fund demand for long-dated assets together with the fact that benchmark indices will include the new 50 year bond is likely to lead to forced buying of 50 year dated bonds. We therefore do not expect to see an upward sloping curve in the UK for the time being.”
A number of pension schemes have been prompted to lock in gains with a move into bonds after the estimated deficit across FTSE 100 DB pension schemes improved by £36bn, over the 12 months ending 30 June last year, JLT Employment Benefits found.
HM Treasury has agreed in principle to give NEST a £329m contingent liability guarantee in the event of the master trust's wind up or closure.
AMP Capital has set up a dedicated team to help institutional investors, including pension funds, invest in infrastructure through direct equity allocations.