Thursday, December 17, 2009

Financing the deficit

It is hard to see why the government does not take advantage of this imbalance of supply and demand to lock in very low real rates. It is clear that this is not just a hedge against inflation, this is due to pension fund demand to match the duration of assets and liabilities and to remove the inflation risk. With a huge amount of funding to be done, now seems to be the time to find out how much demand there is for this sort of security. / Lex / Macroeconomics & markets - UK 50-year inflation-protected gilts: "Far, far away, there is bond. And, like many childhood stories that take place in another age and another land, it shares some of the qualities of a fairy tale. It is government-guaranteed to protect investors against the ogre of inflation for the next half century. Lately, it has delivered six-league boot-sized returns; since March, a gain of almost 40 per cent. As a fairytale hero, however, the UK’s 2055 index-linked gilt looks spent. Over the past three centuries, real UK yields have averaged 3 per cent. This bond offers a 10th of that, a mere 32 basis points."

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