UK launches new 30-year inflation-linked bond with near record-low yield

LONDON: Britain issued 2.25 billion pounds ($3.10 billion) of a new 30-year inflation-linked government bond, drawing over 20 billion pounds in orders despite offering an inflation-adjusted return that is close to a record low.

The United Kingdom Debt Management Office said the new March 2051 index-linked gilt will pay a real yield of -2.0234%, meaning it gives an annual return 2.0234 percentage points below the rate of retail price inflation.

This is the second-lowest real yield recorded at a British government bond syndication, after a 2041 index-linked gilt sold with a real yield of -2.0942% in July 2019, reflecting ongoing demand for long-term inflation protection.

Long-dated index-linked bonds generally attract strong demand from British pension funds and insurers that have long-term inflation-linked liabilities.

Before the latest transaction Britain had raised 48.081 billion pounds through syndicated sales of debt this financial year, part of a record 485.5 billion pounds of bond issuance planned for the 2020/21 financial year to fund government borrowing during the COVID-19 pandemic.

Syndications are typically used to sell very long-dated gilts which are often harder to sell via the auctions that account for the bulk of British government debt issuance.

The yield at Tuesday's syndication is 2.75 basis points higher than the existing March 2050 index-linked government bond , reflecting a price at the top end of initial price guidance, as normal at gilt syndications.

Yields on 30-year conventional gilts on Monday touched their highest since a period of bond market turmoil in March 2020 at the start of the pandemic, tracking a rise in US government bond yields on expectations of higher inflation.

British 30-year retail price inflation expectations, as priced into index-linked gilts, are close to a 14-month high of 3.222% recorded on Dec. 1.

The volume of Tuesday's syndication was much lower than sales earlier in the financial year which all exceeded 6 billion pounds in nominal terms, and similar to volumes at the end of the 2019/20 financial year, before the pandemic.

Bank of America, Citi, Santander and UBS acted as joint leads on the syndication.