Right hand, left hand
The UK Debt Management Office has put a brave face on the disappointing response to its issue of 50-year gilts in mid-July. The DMO, in its second sale of these ultra-long bonds, sold £2.25 billion worth; but the sale drew bids of just 1.23 times the amount on offer, the smallest cover for any conventional gilt auction since the creation of the DMO in 1998. The DMO reintroduced the 50-year gilt in May after a break of more than 40 years. The result was particularly surprising in the light of the supposedly enormous gap between the supply of long-dated assets and the demand for them. Changes to pension fund regulation in Europe – Spain is the latest in a growing line of reformers – as well as increased pensioner longevity are forcing trustees to look hard at their asset/liability matching. In addition, there is a growing belief that the last 30 to 40 years, in which inflation has been high by historical standards and equities have been the logical asset in which to invest, have been some kind of blip.
Arnaud Marès, head of portfolio strategy at the DMO – and his equally French counterpart Benoît Cœuré at the Agence France Trésor – both point out that perpetuals were a plank of government issuance in both countries for most of the 19th century.