Investors pile into UK inflation-linked gilts at auction

Investors flocked to buy index-linked gilts in a UK Debt Management Office(DMO) auction yesterday, despite real yields being the lowest since the bonds were first offered in the early 1980s.

The DMO sold £1.6bn of index-linked gilts maturing in 2024, at a real yield of -1.26%. Investors bid for 1.86 times the securities allotted as inflation concerns grow.

Strategists argued the record low yield reflected strong demand, after the Treasury’s decision last month to loosen the Bank of England’s remit. This would make it easier for the Bank to tolerate going over its 2% inflation target, newspaper the Times reports.

Some analysts also suggested investors may be positioning themselves for a “wall of money” from Japan after the country’s central bank said it would buy $600bn (£390bn) of government bonds and other assets in each of the next two years.

They believe Japanese investors could turn overseas for higher yielding assets, driving up prices, according to the Times.

Simon Ward, chief economist at Henderson Investors, said: “My guess is that speculators are front-running a wall of Japanese money, which is something you have seen in a number of markets.

“Some traders are betting that Japanese investors will sell bonds to the central bank and embark on a ‘desperate search for yield and inflation protection’.”

 

This article was first published on Investment Week

 

 

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