50-year linker tests UK gilt market
Questions remain over how best to price ultra long-dated linkers and the role of hedge funds.
The UK Debt Management Office's syndication of its £1.25 billion, 50-year index-linked bond last month is an understandable strategy. The DMO did not want a repeat of the unenthusiastic response to its conventional 50-year auction in May. But while the deal went smoothly, it left some questions about very long-dated linkers unanswered. Firstly, there is the matter of pricing. Books opened with indicative price guidance at 14 basis points to 19bps below the 2035 index-linked gilt. The book grew to £1 billion in four hours and eventually exceeded £2 billion on day two, when price guidance was tightened to 17bps to 19bps below the 2035. It finally priced at 19bps below the 2035.
The UK had several options when it first thought about how to price the longest dated sovereign index-linked bond in the world. "You can look at the real yield curve and extrapolate forward, look at the breakeven curve and interpolate that curve forward, or have the mathematicians look at convexity," says Dave Hooker of Insight Investment's UK fixed income team.
With a potential investor base varying from price-insensitive trackers to hedge funds that value convexity, it was hard to pick a right or wrong approach for the deal as a whole.