(Adds reaction, market moves)
By Andy Bruce
LONDON, Feb 21 Britain raised 4.5 billion pounds
($5.6 billion) on Tuesday through the sale of a 50-year
inflation-linked bond that offered the lowest-ever
inflation-adjusted return for a British government bond sold via
a syndicate of banks.
British financial markets' inflation expectations hit their
highest level in several years at the start of the month, and
although they are now off their peak, investors are still
willing to pay a high price for bonds that offer protection
The 2065 index-linked gilt trades at more than
twice its face value, and investors accepted a negative
inflation-adjusted return of -1.5235 percent when they bought a
nominal 2.0 billion of the issue on Tuesday.
This was the lowest ever real yield at a British bond
syndication, although last week's sale via auction of a nominal
1.25 billion pounds of 10-year index-linked bonds
drew a record-low real yield of -1.874 percent.
"All told, the bond did cheapen a bit going into the sale,
so it's not a surprise it went well. There didn't seem to be any
issues with the sale. There was a decent-sized order book," said
Jason Simpson, fixed income strategist at Societe Generale.
DMO chief executive Robert Stheeman said the sale
represented a "very successful" end to its syndication programme
for the 2016/17 financial year.
Investors placed orders for the 2065 gilt worth 11.9 billion
pounds in nominal terms, the DMO said, and the gilt sold at a
yield 0.25 basis points below that of the reference gilt, a
linker that matures in 2062 .
This robust demand came at the same time as Bank of England
Governor Mark Carney was assuring British lawmakers in
parliament that market inflation expectations were in check,
despite the likelihood that consumer price inflation would
exceed 2.7 percent this year.
Investors buying the bond sold on Tuesday would need retail
price inflation - which typically runs around 1 percentage point
higher than the BoE's CPI measure - to average 3.35 percent over
the life of the bond for them to be better off holding the bond
than a non-inflation protected equivalent .
At the start of the month, markets priced in RPI of 3.7
percent over the next 30 years - a level not seen since 2011 -
though this measure is now down to 3.54 percent.
Carney said his preferred market measure of medium-term RPI
expectations - which covers a period 5-10 years
ahead - stood at levels consistent with on-target inflation and
had seen less of a rise than German and U.S. equivalents.
For Tuesday's sale, the DMO decided to use up 600 million
pounds of a 1.3 billion pound unallocated portion of its annual
gilt issuance remit, leaving 700 million pounds for the rest of
the 2016/17 financial year running to the end of March.
Barclays , Lloyds , NatWest Markets
and UBS jointly acted as bookrunners on the deal.
In the cash market, gilt prices fell moderately on Tuesday,
tracking other major government debt markets.
Ten-year gilt yields rose 1 basis point on the
day to 1.24 percent.
Thirty-year gilts outperformed other maturities, reflecting
the Bank of England's purchase of the long-dated bonds as part
of its asset purchase programme.
The yield spread between 10-year British and
German government bonds stood at 93.7 basis points,
about half a basis point wider on the day.
March long gilt future 126.08 (-0.22)
March 2017 short sterling 99.64 (unch.)
Sept 2017 short sterling 99.58 (-0.01)
10-year gilt yield 1.24 percent (+1 bp)
-------------------KEY MARKET DATA---------------------------
Long Gilt futures Gilt benchmark chain
Short Stg futures Cash market quotes
Deposit rates Sterling cross rates
UK debt speedguide
-------------------KEY MARKET REPORTS--------------------------
Euro Debt Dollar
U.S. Treasuries Debt reports
--------------------GILT STRIPS DATA -------------------------
Gilt strips data All gilt strips
Gilt strips IO Gilt strips PO
($1 = 0.8023 pounds)
(Editing by David Milliken and Hugh Lawson)