UK investors, for instance, feel the supply of long-dated gilts issued by the Debt Management Office (DMO) on behalf of the government is not enough to meet current demand. However, over the recent past the DMO has significantly increased issuance of these long-term gilts, both in the form of nominal and inflation-linked bonds.
“Last year we increased the curve in both nominal and inflation-linked bonds to 50 years,” said Arnaud Mares, head of portfolio strategies at the DMO. “We have a policy of trying to provide liquidity along the curve and will not do any issuance unless we have strong confidence that demand is not strong and sustainable,” Mr Mares added.
“One has to be aware that last year we issued a great amount of long-dated bonds,” he said. “The increasing bias that we have had over the last two years towards the long end of the curve reflects our perception that we are witnessing strong and sustainable demand.”
It seems, however, that this higher supply is still not enough to satisfy investors’ appetite for long-dated gilts. This demand/supply unbalance has even caused distortions in the UK government bond market. Only last month, the sharp rise in prices of long-dated bonds pushed the real yield of the 50-year inflation-linked bond – issued by the DMO at the end of last year – down to 0.38 per cent.
Over the next few years the issuance of long-dated governments bonds across Europe is expected to be much higher than it has been in the past, but duration and types of vehicles will differ from country to country as national debt levels vary hugely across the continent.
“We very much listen to the market,” said Erik Wilders, agent of the ministry of finance at the Dutch State Treasury Agency. “We have a very clear mandate: cost versus risk. Supply will meet demand and we’ll issue whatever suits our objectives.”
However, and according to Mr Wilders, for the time being the Dutch government will only be issuing nominal bonds, as issuance of inflation-linked bond “is not on the cards”.
This comment will disappoint many of those who expected to see Dutch inflation-linked bonds in the near future, especially now that new regulations will force pension funds to focus more on matching their long-term liabilities.
Other countries in Europe, including the UK and Sweden have been issuing ‘linkers’ for years, whereas some, like Germany, are still considering the option.
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