(Bloomberg) -- The UK received a record £46 billion ($57 billion) of demand for an inflation-linked bond sale, with investors seizing the opportunity to buy government debt that acts as protection against price rises.
The country’s debt management office offered £4.5 billion of notes due in 2045 with a coupon linked to the retail price index. It set a final spread of 3.75 basis points over an outstanding 2044 inflation-linked bond, according to a person familiar with the matter, who asked not to be identified as they are not authorized to speak about it.
The orderbook, which includes interest from the joint lead managers, is well over any similar sale of UK index-linked bonds tracked by Bloomberg.
“This sale would indicate that demand for inflation hedges remains healthy but a lot of demand for inflation-linked gilts is captive demand,” said ING rates strategist Antoine Bouvet, referring to pension funds that favor this type of debt as a way of matching liabilities. He added that a £3.3 billion reduction in gilt supply compared to an earlier forecast in March may have also helped demand.
Data last week showed Britain’s inflation rate remained higher than economists expected in March. The Consumer Prices Index rose 10.1% from a year ago, driven by the strongest increase in food prices in more than four decades. Inflation has been in double digits for eight of the past nine months.
The sale is also a sign of more solid demand for the securities that were at the center of UK market chaos last year, when a sudden rise in rates following former Prime Minister Liz Truss’s fiscal plans sparked mass selling by leveraged pension strategies. That forced a an intervention from the Bank of England and contributed to Truss’s downfall.
Since then, those liability-driven investment funds have faced new regulatory scrutiny. Such products should be resilient to bond yields spiking by two-and-a-half percentage points at a minimum, the Bank of England’s Financial Policy Committee said last month. The Pensions Regulator recommended a similar buffer earlier this week.
“At this pricing level, it should result in good liability-driven investment fund interest,” said Megum Muhic, an analyst at RBC.
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