The longest-dated UK government index-linked gilt has been the best performing government bond of 2016 as investors scramble to buy inflation protection in the wake of Britain's shock decision to leave the European Union. The UK government's 0.125 percent 2068 inflation-linked bond has risen 57 percent year-to-date and 35 percent since the Brexit vote on June 23, according to asset manager M&G Investments.
Thomson Reuters numbers put the gain even higher at 61 percent to a cash price of 260.35, or a real yield of minus 1.77 percent. In early August, the BoE revised up its inflation forecasts sharply, due to the big fall in sterling since the June 23 referendum, predicting it will hit 2.4 percent in 2018 and 2019.
Meanwhile pension funds are pressing the government to issue more index-linked bonds to insulate them from inflation and help cope with accounting deficits that have widened since the Brexit vote. "The pension fund deficit is in the 100s of billions of pounds and the funds have to hedge inflation risk: the main means by which you do that is the index-linked gilt market," said Jonathan Crowther, head of liability driven investment at AXA Investment Managers.
"Already 70-80 percent of the hedging is in the inflation-linked market so there's enormous demand from pension schemes. Every time we get a shock to the system, that's effectively dragged real yields down a long way." The UK's Debt Management Office said on Tuesday it would sell at least one index-linked bond through syndication and two in regular auctions during the third quarter of this year.
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