February 6, 2018 / 5:18 PM / 3 months ago

UK gets strong demand for inflation-linked debt as global markets convulse

LONDON (Reuters) - Britain received strong demand from investors when it sold several billion pounds of 30-year inflation-protected debt on Tuesday, as global market ructions sparked by fears of faster U.S. inflation deepened.

Investors placed orders worth 16.3 billion pounds ($22.7 billion) for the 0.125 percent 2048 index-linked gilt GBIL0E48= at a syndicated sale. This allowed the UK Debt Management Office (DMO) to raise around 4.5 billion pounds through the sale of gilts with a face value of 2.75 billion pounds.

The gilts were sold at a real yield of -1.475 percent, the third lowest on record and an indication of robust demand. The DMO said domestic investors accounted for about 85 percent of demand, as is usual for this type of gilt.

“We have seen a very pleasing conclusion to our 2017/18 syndication programme today,” DMO chief executive Robert Stheeman said. “This was a very smooth and well-executed transaction attracting high quality demand from our core domestic investor base.”

The sale pushed up real yields slightly across the longest-dated British linkers as prices fell while the market digested the issuance, compared with price rises for shorter-dated debt .

In the wider market, conventional gilt yields fell sharply along with those for German Bunds and U.S. Treasuries as equity prices took another dive.

The current bout of market instability stems from strong U.S. wage data last Friday that fuelled expectations of higher inflation and interest rates.

While that initially hurt bond markets, the scale of the drop in equities this week has sent investors heading back to the safety of fixed-income assets.

Societe Generale fixed-income strategist Jason Simpson said the latest rally in gilt prices implied markets now saw less of a chance that the BoE would raise interest rates in May.

No economists polled by Reuters last month expected the BoE to raise rates at this week’s meeting, but an increasing number saw a chance of a May move and Simpson said financial markets had priced in a probability of as much as 70 percent.

The BoE indicated in November that it would probably need to raise interest rates twice more over the next few years if Britain’s economy developed as expected.

“(Yields) had been pricing in a 60-70 percent chance of a May rate hike — I just don’t buy it, I don’t think the Bank of England would change their tune so quickly,” Simpson said.

“I think people have maybe had a step back after seeing equities wobble, and there are still a lot of risks out there.”

He pointed to a renewed lack of clarity from Britain’s government about its ultimate objectives when it leaves the European. “There’s still a very confused picture, that’s induced a little of bit of instability around (Prime Minister Theresa) May’s premiership,” Simpson said.

Ten-year gilt yields GB10YT=RR fell 4 basis points on Tuesday to 1.52 percent.

The yield spread between 10-year British and German government bonds EU10YT=RR rose to 82.7 basis points, around a basis point wider on the day.

BofA Merrill Lynch, JPMorgan, Lloyds Bank and Santander acted jointly as bookrunners for Tuesday’s syndicated linker sale.

Editing by Catherine Evans

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