Pension funds are betting that the Bank of England will not control inflation

MPC member Silvana Tenreiro's assertion that lower inflation is «almost guaranteed» did not convince pension funds REUTERS/Elizabeth Frantz

Demand inflation-protected government bonds hit an all-time high in a sign that investors are skeptical of the Bank of England's claim that a fall in inflation is «largely guaranteed».

A sale of inflation-related securities were over ten times higher on Wednesday as pension funds and other long-term investors rushed to buy products.

Unlike traditional bonds, so-called «linkers» yields are pegged to the Retail Price Index (RPI), which was 13.5% in the year to March.

This protects investors' cash from rising inflation.

According to the Debt Management Office (DMO), which borrows on behalf of the Treasury, the UK received a record demand of £46bn on inflation-related securities sales on Wednesday on Wednesday.

Demand surpassed the previous record of £29bn in a similar securities sale in 2021, more than ten times the £4.5bn bond offering.

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Imogen Bahra, Head of UK Rate Strategy at Natwest, said the rise was partly driven by the current double-digit inflation rate, which was higher than analysts expected in March.

Ms Bahra said: “I think , last week's inflation data [showing 10.1% CPI inflation in March] may have indicated that there is more persistent inflationary pressure than we previously thought.

«I think there's also an element of concern about the trajectory of inflation because it's not coming down as fast as we might have expected just three months ago.»

The Bank of England believes inflation will drop sharply this year. Silvana Tenreiro, an external member of the Bank's nine-member Monetary Policy Committee, told MPs in February that a reduction in inflation was «largely guaranteed.»

However, recent data suggests that price pressures may linger for longer, forcing policymakers to keep interest rates higher for longer.

This expectation has driven bond yields up in recent weeks.

Ms Bahra said pent-up demand from pension funds has also boosted the order book.

Pension funds have traditionally bought index-linked securities, but since the mini-budget was passed, they have reduced their purchases, causing bond prices to fall.

Higher overall bond yields as a result of DMO actions. The huge £237.8bn funding target this year has also spurred demand.

Ms Bahra said: “We have seen fixed income prices drop in the UK over the past couple of weeks. In addition, we may have seen an increase in demand from pension funds.

«Demand has been low in recent months as they await regulatory clarity.»

The latest DMO bond offering represents the first of seven so-called «syndicated» sales in this fiscal year, in which it traditionally offers investors larger amounts of riskier debt, including long-term and non-traditional bonds such as linkers.

Sir Robert Stiman, chief executive of DMO, said he was «very pleased» debt auction, which he says reflects «the breadth and scale of support we're getting for this product from our core and broader investor base.»