Currencies

Dollar rises as markets turn eyes to Opec

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members. Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in […]

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Banks

Basel Committe fail to sign off on latest bank reform measures

Banking regulators have failed to sign off the latest package of global industry reforms, leaving a question mark hanging over bankers who complain they have faced endlessly evolving regulation since the financial crisis. Policymakers had hoped to agree the contentious new measures at a crunch meeting held in Chile this week, but a senior official […]

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Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

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Economy

Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Financial

Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Categorized | Capital Markets

‘Linker’ gilts rebound after shake-up wobble


Posted on October 3, 2016

©FT

Britain’s financial markets are locked in a tug of war over radical proposals to shake up the UK’s pension industry that could trigger large-scale losses for investors in index-linked government bonds.

The Financial Times reported last week that MPs were considering a plan to permit private sector pension schemes to break promises that link payouts to increases in consumer prices in a bid to ease the effect of growing pension fund deficits.

    The news led to a sharp drop in prices for index-linked gilts used by pension funds to match inflation promises with prices for a 2068 inflation-linked bond down 10 basis points on the day.

    However, British government bond fund managers say demand for so-called “linkers” has quickly rebounded, outstripping appetite for conventional government bonds in spite of the potential policy change.

    Year to date, the difference in performance between the two is stark, with prices for the inflation-linked 2068 gilt up 65 per cent, against a 39 per cent price increase in conventional gilts.

    A work and pensions select committee will examine ideas to increase pension scheme flexibility this month as actuarial consultant Mercer warns that UK corporate profits are coming under pressure from rising pension costs triggered by the fall in bond yields used to calculate liabilities.

    Investors point out that the need for insurance companies and pension funds to match liabilities has not yet been eliminated, with some sceptical that any change will take place.

    Mike Riddell, gilt fund manager at Allianz Global Investors, added that, with only two sales of index-linked gilts planned for the rest of the year, demand for existing bonds should stay healthy.

    “The short- to medium-term technicals for linkers are trumping anything else,” said Mr Riddell.

    “There has been very little supply and there’s a constant drip of demand from pension funds and liability-driven investors [that is, insurance companies].”

    Following the UK’s vote at the end of June to leave the EU, demand for index-linked bonds has exceeded the rally in vanilla government bonds as investors bet on a pick-up in inflation from current ultra-low levels.

    The UK’s five-year ‘break-even inflation rate’ — the difference between the yield on conventional gilts and index-linked gilts — is currently 2.7 per cent, up from 2.2 per cent before the EU referendum, as markets factor in the long-term effect of sterling’s fall on the price of imported goods.

    But regardless of the increase in inflation and the pressure on pension funds struggling with growing deficits, Luke Hickmore at Aberdeen Asset Management is doubtful that any significant change to pension fund inflation matching will occur.

    “If the rules actually change then I think you could expect to see a serious move in the prices for index-linked gilts,” said Luke Hickmore, senior investment manager at Aberdeen Asset Management.

    “But so far this is speculation and I’m not sure there is the political will to make the change — in spite of the pressure from certain politicians. People expect their pensions to increase over time — the method of calculation is not perfect but changing it would create a huge market shift that I’m not sure politicians will want.”