UK considers inflation-linked bond
by Brian Turner
In addition to the issue of a conventional 50-year bond in May, the UK Debt Management Office is giving serious consideration to issuing an inflation-linked 50-year bond in the third quarter of 2005.
No decision has been taken yet, but the issuance of such a long-term bond linked to inflation, which would serve to protect investors from future price increases and would also satisfy a growing demand, is considered to be a good possibility
It is also seen as a less expensive way for government to finance rising debt. These inflation-linked bonds are also seen as a hedge against inflation.
This is an important factor influencing investor interest in the possible bond issue because the current period of low inflation might not last and many investors possess liabilities that will go up with inflation.
There is some worry, though, that current low bond yields, coupled with high prices, will undermine the real rate of return on these long-term bonds.
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