Salient to Investors:
UK inflation-protected bonds are poised for their worst year in more than a decade as government proposals to change the way it calculates a gauge of retail prices threaten to lower payments on the debt.
Capital Economics said a recalculation of inflation indexes may save the government 7 billion pounds a year by 2016-2017.
Michael Amey at Pimco dislikes long-dated UK index-linked bonds because they will continue to suffer due to uncertainty over the inflation calculation.
Paul Mueller at Invesco Asset Mgmt said there is a view that if the government starts to tinker around with inflation calculations, they may do the same with other things, giving the wrong signal to overseas investors.
Alan Clarke at Scotiabank Europe said a change is inevitable as doing nothing would be a complete farce.
Mark Capleton at Bank of America Merrill Lynch said the losses suffered by UK index-linked bonds won’t be repeated in 2013 as clarity on the issue and a pause in the BoE’s bond purchases will help to restore demand. Capleton is bullish about the bonds on a break-even basis over the next 12 months, regardless of the CPAC outcome, and said the conventional bond market will need to adjust to a world without quantitative easing, which has masked a steady drift upward in inflation expectations.
JPMorgan Chase & Co. estimated the market has already priced in 80 percent of the worst-case scenario for a change in the RPI.
UK inflation-protected securities are being undermined by a government plan to allow companies to reduce their pension deficit by changing valuation methods.
Dagmar Dvorak at Baring Asset Mgmt said the inflation calculation review is the biggest factor holding us back from buying UK index-linked bonds.
Click here to receive free email alerts of articles as soon as they are posted.