Reaction to UK long-dated gilts announcement
UK - Here's a roundup of industry reaction to Chancellor Gordon Brown's announcement yesterday that there would be more issuance of long-dated gilts.
* Bob Scott, partner at Lane Clark & Peacock: "Increasing the supply of long-dated gilts will at best provide a temporary respite from the pressures that have seen pension fund deficits remain stubbornly high despite record stock market returns and increased contribution levels.
"It may also ease some of the pressure on yields although how long this will persist is debatable as the PPF levy calculation for 2007/08 is expected to encourage further bond investment by pension funds.
"Demand from pension funds for long-dated bonds is high and, with a captive market, the opportunity for the Government of borrowing money for the next 50 years at real yields of under 1% was too good to miss."
* Andrew Green, head of investment strategy at Mercer Investment Consulting: "On the face of it, the Chancellor's statement that up to two-thirds of nominal and index-linked gilts will be issued at long maturities is good news for pension funds. But, as is often the case, the detail does not live up to the rhetoric."
"The proportion of the fixed gilt market represented by long-dated gilts (i.e. over 15 year) will actually shrink over 2006." The "inevitable consequence" was that nominal yields were likely to fall. Mercer has highlighted this anomaly to the Debt Management Office.
Green added: "Increasing the proportion of long-dated gilts would help meet UK pension fund demand and would improve the current pricing situation affecting gilt markets. However, the Government's detailed statement today provides little certainty of any real progress to improve the position for UK pension funds."
* Denis Gould, UK head of fixed income at AXA Investment Managers: "I believe that there are many market participants who believe that pension fund demand will drive long yields lower, but had removed their curve flattening positions ahead of the funding announcement in case a larger amount of long funding was announced.
"In the coming days I expect these investors to reinstate their curve flattening positions and drive long dated yields lower."
He added that the funding remit was a little less aggressive than the market had expected so the level of sales would "prove sufficient to remove an element of panic demand and allow pension funds to buy bonds when they believe they represent value".
* Nick Horsfall, senior investment consultant at Watson Wyatt: "Watson Wyatt considers the announcement today of the DMO's changed remit as major news in the context of UK pension schemes' ability to efficiently manage risk, and where needed the ability to increase the security of members' benefits through the acquisition of suitable government debt when appropriate.
"The increase in flexibility for the DMO to issue £2.5bn of debt per quarter in areas viewed as necessary and also the commitment to at least monthly long index linked auctions are positive. Likewise a move to greater access for true end users - i.e. pension funds and representative bodies - rather than predominately asset managers to attend 'end user consultation' is likely to help the DMO understand what pension funds actually need.
* Ian Fishwick, head of UK fixed income, CSAM: "The nature of the demand for long gilts means that no one can be sure at this point whether the increased issuing will be sufficient to meet all the demand during the course of the next year at current yield levels. The main points about the new remit were as follows:
"The market has rallied in the short term as the details of the new remit have become clear, but we must now wait to see whether pension funds continue to rush to switch into long gilts at 4% nominal and 1% real yields."
* Quentin Fitzsimons, manager of the Threadneedle Absolute Return Bond Fund: "Nothing was said about the funding issues faced by pension funds, but given the sensitivity of this subject this may be inevitable. However, index-linked gilts are the government's cheapest source of borrowing and these changes will help raise more capital in this area."