UK - Today's auction of inflation-linked British bonds garnered the lowest demand since October 2008 as analysts said the government's planned changes to pension indexing created uncertainty for fund managers.
The Debt Management Office sold £1.2bn (US$1.8bn) of 1.875% inflation-protected bonds maturing in 2022 at a yield of 0.947%, up from the rate of 0.765% at a similar sale on May 13. Investors bid for 1.76 times the amount of debt on sale, down from a so-called bid-to- cover ratio of 2.49 at the May auction.
It's the first offering since the nation's two-month-old governing coalition last week said that state employees' pensions will be linked to the consumer price index of inflation rather than the retail price index.
Prime minister David Cameron's (pictured) government may save money as CPI has shown inflation to be an average 0.7 percentage point lower than RPI over the past 20 years, said Jasper Falk, JPMorgan's global head of inflation trading.
U.K. inflation-linked bonds are based on RPI, which unlike CPI includes such items as mortgage-interest payments and local taxes. That creates a disconnect for asset managers who buy inflation-linked debt to fund a pension fund's long-term liabilities, Falk said.
"There are going to be real challenges to the inflation- linked bond sales this month," Falk said before today's auction. "Demand for RPI hedging is likely to be significantly reduced."
The Conservative-Liberal Democrat coalition, which took power after the May 6 election, is raising consumer taxes and cutting spending to tackle the nation's record budget deficit that reached 11% of gross domestic product in the last fiscal year.
The sale today is part of 165 billion pounds of bonds the Treasury plans to issue in the fiscal year that will end in March. Of the total, £33.8bn will be in inflation- protected securities, DMO data shows.
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