Gilts auction sets a record low yield

Strong demand from pension funds for the latest issue of 50-year index-linked Government bonds sent the yield to a record low yesterday.

The auction of £650m of 2055-dated gilts was almost twice over-subscribed, the Debt Management Office said. Intense bidding pushed the yield - the rate the Treasury will have to pay the bondholders after inflation - to just 0.46 per cent, a record for an auction.

The result came as an independent survey showed high street banks had slashed savings rates on key products.

Yields on gilts in the secondary markets fell to a historic low of 0.38 per cent last week as pension funds scramble to get their hands on long-dated debt to plug deficits. Fund managers are caught in a vicious circle, as pension liabilities are valued using bond yields. If they fall, funds have to buy more, which in turn drives the price up and the yield down.

City experts and Opposition politicians have called on the Treasury to issue more long-dated gilts or scrap its recently installed pension regulation scheme. Chris Huhne, a member of the Liberal Democrat Treasury team and a leadership contender, has said an increase in new index-linked gilts would not only protect pension funds, but would also be a great opportunity for the Treasury to refinance much of the national debt at very low interest rates.