Auction of 50-year gilts fails to excite institutional investors

The Government managed to generate only muted interest yesterday in the first 50-year gilt sale since 1960, as institutional investors shunned the historic issue for fear that inflation will eat away at its value over coming decades.

The Government managed to generate only muted interest yesterday in the first 50-year gilt sale since 1960, as institutional investors shunned the historic issue for fear that inflation will eat away at its value over coming decades.

A total of £2.5bn was raised as planned, but the issue was just 1.6 times covered by bids from investors, and the value of the bond fell later in the day. The gilts will pay a coupon of 4.25 per cent.

"People were buying out of necessity rather than people falling all over themselves to buy the yields," said John Wraith, the interest rate strategist at RBS Financial Markets.

Such ultra-long dated government bonds had fallen out of favour because the inflation of the Seventies eroded their value so sharply, but their return to favour represents a triumph for central bank management of inflation.

For the Government, the issue allows it to lock in new debt at some of the lowest interest rates for a generation. For pension funds, crying out for ultra-long bonds, it will provide a predictable income with which to be more certain of meeting long-term pension liabilities than they can be with equities.

And yet yesterday's response to the UK auction stood in stark contrast to the investor enthusiasm which surrounded France's return to 50-year bond issuance in February. Then, the French government sold €6bn (£4bn) of bonds, twice as much as originally planned, and could have sold €13bn more to meet the total demand.

Analysts said inflationary expectations have risen in the intervening months, while a growing uncertainty over the outlook for the global economy has increased volatility in financial markets. A Goldman Sachs analysis, published before the sale, cautioned investors that it was difficult to be certain the value of the interest on the new gilts would not be wiped out in real terms by inflationary bubbles over the next five decades.

"It certainly was a fairly muted response to the auction," said Andre De Silva, an HSBC strategist, although he said the bond market had been subdued yesterday because of a wave of selling of US Treasuries late on Wednesday.