Gilts: Pension funds disappointed by bond volumes

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The Independent Online

The long-awaited decision on the volume of Government bond issuance over the coming year disappointed pension fund managers but delighted investors.

The Chancellor had come under intense pressure to ratchet up the volume of new bonds from pension funds that have to fill their deficits with long-dated index-linked gilts. In the end, however, Gordon Brown lived up to his nickname of the Iron Chancellor by disappointing market expectations.

The Treasury's debt management office (DMO) announced gross gilt issuance in the fiscal year starting in April of around £63bn, below the £68.5bn the market had expected. Analysts said demand for long-dated index-linked bonds would remain strong, as pension regulations mandated fund managers to buy long-dated gilts to offset deficits in their final salary schemes.

The National Association of Pension Funds said the new issuance was disappointing given the "hundreds of billions" worth of pension deficits. Joanne Segars, its director of policy, said: "Every extra helps but it fails to match the demand for index-linked gilts from both pension funds and insurance companies who are chasing these sorts of instruments."

Speculation about a big rise in bond sales surged after the real yield on long-term index-linked gilts plunged to historic lows below 0.5 per cent late last year as pension funds and speculators chased after the stock of gilts.

Nick Rudd, pensions director at BDO Stoy Hayward Investment Management, said the Chancellor had missed an opportunity to address the issue. "As widely expected the Chancellor has taken advantage of the price bubble in long-dated Government bonds to borrow at historically very cheap rates of interest," he said. "Having said that, the increase in supply falls well short of correcting the supply/demand imbalance. Overall, a move in the right direction but not enough to make a difference."

The DMO announced details of £55.5bn out of the total with two-third going to long-dated gilts with the rest at 10 years or shorter gilts, leaving £7.5bn still to allocate. It said it would issue "at least" £16bn of index-linked long-dated gilts in a programme of 16 auctions, alongside sales of £19.5bn of conventional 30- and 50-year gilts.

Kieron Lynch, from at Deutsche Bank's gilt sales department, said there had been a steady flow of speculative purchases of long-dated goods. "They had expected somewhat more radical action than what was delivered by the Chancellor," he said.