UK - F&C has called on the UK government to issue 50 year and inflation-linked gilts, predicting ongoing demand for the bonds as pension and insurance funds continue to strive to match assets more closely with liabilities.
In a paper responding to the Debt Management Office (DMO) consultation on the issuance of ultra-long gilts and gilt annuities, F&C head of gilts and government bonds, Helen Roberts, suggested the size of ultra-long issuance should initially be “relatively small”, about £2bn, enabling the DMO to more accurately gauge the appetite for 50 year bonds.
She added that there would be “significant interest” from European pension and insurance funds wanting to buy 50 year gilts, which are also facing new fund legislation.
Roberts warned including the new bonds on the FTSE indices would lead to forced buying by investors, so proposed excluding the 50 year bonds from the indices or adding a new sub-sector, 15-35 years, with sufficient warning to allow clients to express a preference.
“Given the inverted curve and the likelihood that a new 50 year gilt could yield 0.25% lower than the current longest gilt, investors could take the view that issuing 50 year gilts now may be more attractive for the government than for long-term investors,” she wrote.
“Liquidity concerns could also prove problematic for investors in 50 year gilts. The practice of issuing across the curve in shorts, mediums and longs may have to be re-thought if the DMO wants to avoid a potential squeeze in 50 year bonds as there is a high risk that early issuance would be bought and locked away by investors. Conversely, liquidity in very long-dated swaps could improve as a result of the introduction of 50 year gilts – this would be a benefit.”
Roberts also predicted there would be interest in 50 year annuity gilts.
“Annuity funds currently struggle to provide good matches for their liabilities longer than 30 years and to achieve this with conventional gilts would require an issue for every year’s outstanding liability,” she wrote.
“Given that liabilities shorter than 30 years can be matched using credit bonds and current gilts there could be an argument for a gilt that amortises from 30 to 50 years.”
F&C manages about £20bn in gilts and index-linked gilts on behalf of UK and European pension and insurance funds.
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