The UK government is poised to become the first in the world to issue an inflation-linked 50-year bond to satisfy rising demand for such assets from institutional investors.
The Debt Management Office which borrows on behalf of the government already plans to sell a 50-year conventional bond next month. But an ultra-long bond linked to inflation and therefore protecting investors from the risk of future price rises could come in the third quarter of the calendar year.
While a formal decision is unlikely to come until after the conventional bond is placed, officials at the DMO said on Monday that “there is no reason not go for a linker after that”.
Pension funds are under growing pressure to improve the way they match their assets with their long-dated liabilities, partly because of regulatory requirements, but also because people are living longer.
Issuing such long-dated bonds during a time of historically low interest rates is also a cheap way for the government to reduce the cost of funding the country’s rising debt.
But while demand is expected to be high for the conventional 50-year paper, there are investors who are largely interested in index-linked gilts because they also have the added advantage of serving as hedges against inflation.
This is particularly important because the recent period of historically low inflation may not last and many investors have liabilities that rise with inflation.
However as the current Chancellor Gordon Brown will not give govt lending details more than 3 years in advance and Standard & Poors estimates that in 50 years time the creditworthiness of UK gilts will be on a par with junk bonds we wonder who will buy this issuance.