UK sells inflation-linked bond with record negative real yield

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LONDON, Nov 10 (Businesshala) – Britain on Thursday sold a 10-year inflation-linked government bond at auction with a record negative real yield, meaning investors holding debt to maturity could face record losses in inflation-adjusted terms. Will have to face

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The Debt Management Office sold 900 million pounds ($1.2 billion) of 0.125% index-linked gilts maturing in 2031 with an actual yield of 3.242%.

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The bond will pay a coupon that represents an interest payment of 3.242 percentage points less than the current rate of retail price inflation. The RPI is currently at 4.9%, the highest since November 2011.

In fact, investors who buy a gilt and hold it till maturity can expect a real loss every year equal to 3.242% of their initial investment.

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The RPI should average around 4.2% over the bond’s lifetime for investors to hold the index-linked gilt better than similar 10-year traditional bonds, which pay a yield of 0.8%.

Inflation has risen in recent months as the world economy recovers from the COVID-19 pandemic and grapples with supply-chain disruptions. Central banks say the rise in inflation will be temporary, but some investors fear it could last longer.

The RPI is generally about 1 percent higher than the consumer price inflation targeted by the Bank of England. Britain’s Office of National Statistics plans to recalculate the RPI from 2030 to make it CPI-compliant.

Despite the loss-making nature of these bonds for long-term investors, they attract demand from pension funds, which are required by regulators to match inflation-linked liabilities, such as some corporate pension plans and annuities. .

Negative real returns reflect the era of ultra-low interest rates that began after the financial crisis. The last time an index-linked gilt was sold at auction with a positive real return was in 2014.

In the late 1990s and early 2000s, positive real yields over 2% were common. (Reporting by Andy Bruce and David Milliken)

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