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Interest in UK debt rebounds following CPI-link announcement

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UK - Interest in index-linked gilts returned this week, after the UK Debt Management Office successfully sold £6bn worth of bonds maturing in 2040.

An auction two weeks ago of 12-year bonds saw the lowest demand since October 2008, with only £1.2bn of debt auctioned.

It came shortly after the government announced pension payments would in future be linked to the consumer price index (CPI), rather than the retail price index (RPI).

In the wake of the auction, the UK Debt Management Office (DMO) said it was ready to take advice from investors on market requirements, although it confirmed no plans were in place to issue CPI-linked gilts.

There is still uncertainty about the precise impact of a switch to CPI.

Robert Gardner, founder and co-chief executive of investment consultancy Redington, said one client of his could "perversely" end up with higher pension liabilities, as a result of possible wording of the new law and its scheme's rules.

He said: "At the moment there is a huge amount of confusion. The Pension Regulator is telling trustees to update their members on what's happening.

"It's unclear, the legislation hasn't gone through yet and there is a whole load of potential unintended consequences, so people still need to work out what their true liabilities are."

Miles Tym, fund manager of institutional gilt portfolios at M&G Investments, said that, despite risking changes in the differential between CPI and RPI by investing in the gilts, they were still "a better match than equity or commercial property".

He added that, even if the changes in law pass, investing in RPI-linked vehicles is still not a bad proxy and that he believed there would still be demand in future.

Despite this outlook, he said there was an interest in CPI vehicles.

"Going forward, it is quite likely new, improved liabilities will be CPI-based," he said.

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