Inflation Linked Gilt Auction 30 X Oversubscribed

Published / Last Updated on 26/04/2021

30 X Oversubscribed Index Linked Gilt Auction Means Inflation Is On Its Way:

We have covered many times on this site that Covid-19 government borrowing around the globe is unlikely to be repaid.  For example, in the UK, there is no way HMRC could knock on millions of household’s front door in the UK that are actually paying taxes and ask for a cheque to repay a share £500 billion of covid debt.  Many could afford their share but there are equally as many who could not.   This is not just a UK problem it is a global debt problem i.e.  a problem for all governments.

In the 1980s, Margaret Thatcher was elected a Prime Ministerr with the UK  having record public sector debt and then she allowed inflation to run for around 10 years.  Even at just 5% pa compounded, that is a huge 62% over 10 years.  It is by using inflation that Thatcher devalued the UK debt position without repaying it.

Alarm Bells Ringing

We have already seen in November 2020, the Federal Reserve suggesting it will not control inflation with interest rates.  This means the Fed wants or is expecting inflation.  A by-product will be inflation devaluing its National Debt.

Likewise in the UK, Rishi Sunak suggested that the Government will look to change how they calculate the Retail Prices Index (RPI) to bring it into line with the lower Consumer Prices Index (CPI) on or around 2030.  Yet another indicator that the UK expects inflation to be higher with the by-product of inflation devaluing National Debt.  The reason for this is that some government debt is RPI linked, hence a need to cut this rate back in the future so that the government does not pay as mush in debt interest.

Gilt Auctions X 30 Oversubscribed

A Gilt Auction is where the government sells fixed rate or index linked debt to raise capital by weekly auction. 

A huge indicator that many professional and institutional investors are planning for inflation is that in the recent UK Debt Management Office (DMO) Gilt Auction, the issue on 14 April 2021 of £713,830,000 index linked gilts was oversubscribed by 30 times.  Whilst fixed rate debt was freely available and bought by investors, real demand was there for inflation linked government debt.

On the above auction, Average Accepted Yields (AAP) were minus 1.979% pa.  This means that investors paid over the asking price for the debt and its ‘interest’ coupon as investors will accept a negative yield return initially but with the protection of inflation over the coming years that will wipe out the initial negative 1.979% return.

With the last few auctions in March, February and January, UK index linked gilts too had negative AAPs of around 2.5% pa.  All this prompts us to believe that investors are heading for inflation protection and prepared to pay a little more right now.

We have been suggesting to clients for many months now to consider moving from fixed rate to index linked gilt funds and we believe that whilst they have negative yield returns at present, this is going to change very soon and very quickly move upwards with some commentators suggesting 2% pa inflation by May 2021.

Prices will rise on Brexit, Covid-19 debt, other National debt with people paying more for goods and services.

Is it time to revisit and rebalance your portfolio with an inflation hedge?

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