Today the UK's Debt Management Office issues a 50-year gilt the first of its kind. The new offering will comprise of £2.5bn of 2055-dated paper, carrying a coupon of 4.25%. Who will this benefit? David Scammell, manager of the Schroder Gilt & Fixed Interest Fund takes a closer look at the Governments issuance:
The Government recognises the high level of demand that exists for high-quality, long-dated bonds. This has arisen from increased demand by defined benefit pension schemes, which are being driven largely by ageing maturity profiles and legislation which encourages these schemes to better match their assets against their liabilities. Despite additional issuance over recent years, the demand for long-dated bonds outweighs supply, and this has driven up their prices.
At Schroders we are confident these gilts will be well received. Why? Because pension deficits continue to grow and schemes continue to make the move from equities into long-dated bonds in order to plug the pensions gap'. There will be substantial demand from pension schemes and insurers seeking to extend the duration of their portfolios.
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The Government's initiative to consider 50-year issuance will also be welcomed by the market and should go some way to redressing the supply/demand imbalance within the market. Moreover, they'll also assist pension funds to develop more appropriate investment strategies to meet the objectives of their schemes.
So what about the low level of yield offered (currently, the 30-year benchmark bond offers a yield of 4.33%)? We think the new 50-year bond is attractive given the strong demand backdrop and given our economic scenario that UK interest rates should begin to fall later this year. The new bond will lengthen the overall duration of the FT-Actuaries Government All Stocks Index, forcing most money managers to buy it.
What's more, we expect this to be the first stage in the Government's issuance of ultra long-dated bonds and expect its success to be followed by further tranches later this year and possibly extended to include an index-linked offering. Last month a similar 50-year offering by the French government was three times oversubscribed and we expect to see similarly strong demand at this week's auction in the UK.
By David Scammell, manager of the Schroder Gilt & Fixed Interest FundSchroder Investment Management Limite
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