UK Markets close in 57 mins

UK 30-year debt tumbles after annual budget unveils pension changes

* Thirty-year gilts suffer biggest fall in over 4 weeks

* Pension changes likely to reduce demand for annuities

* Pensioner bond brings unexpected cut in gilt issuance

* Lower issuance helps short-dated gilts outperform Bunds

By David Milliken

LONDON, March 19 (Reuters) - Long-dated British government

bonds tumbled on Wednesday after finance minister George Osborne

said older people would no longer have to invest pension savings

into annuities that provide an income for life.

Thirty-year bonds suffered their sharpest

one-day fall in more than four weeks, pushing their yield up by

4 basis points on the day to a six-day high above 3.49 percent.

Long-dated bonds are frequently bought by insurers who sell

annuities to the public, as the regular interest matches up with

the payments that insurers make as part of the annuity.

Shorter-dated government bonds fell less, as the amount of

government bonds being issued in the next financial year was

forecast to be more than 20 billion pounds below what the market

had expected at 128.4 billion pounds ($213.5 billion).

The reason for this is not an unexpected improvement in

Britain's budget deficit - which will remain one of the largest

in Europe at 5.5 percent of GDP next year - but another

government measure to tap pensioners for savings.

Later this year the government will allow pensioners to

invest up to 10,000 pounds each in retail bonds paying interest

of 4 percent over three years or 2.8 percent over a year.

By contrast, the government can currently raise money from

the markets at a cost of just 1 percent over three years

, and the current Bank of England rate is 0.5 percent.

The government will also increase the amount of money that

individuals can invest in premium bonds by 10,000 pounds.

Robert Stheeman, chief executive of the UK Debt Management

Office, told Reuters that these two measures alone reduced the

amount Britain needed to raise via gilts by 13 billion pounds.

The lower gilt issuance caused 10-year gilts to

pare losses caused by a sharp fall in German Bund prices earlier

in the day, although yields still finished the day 2 basis

points higher at 2.70 percent.

The gilt's spread over 10-year Bunds tightened 2

basis points on the day to its lowest since March 4 at 108.9

basis points - a sharp contrast to the 30-year gilt, which

underperformed versus German debt.

Marc Ostwald, fixed income strategist at Monument

Securities, said Wednesday's changes were likely to cause

long-term damage to demand for longer-dated bonds, as they both

reduced the requirement on Britons to make long-term investments

and increased short-term investment returns.

"The full impact will only be felt over months and years,"

he said. "It could become one of those horrible attritional


Ostwald also said the move went against the government's

strategy of locking in very low long-term interest rates by

selling more long-dated gilts.

But Sam Hill, a strategist at Royal Bank of Canada (Toronto: RY-PC.TO - news) , was more

positive, saying that other potential changes - such as allowing

workers with final-salary pension schemes to take a cash pot

instead - could create a new source of demand for annuities and

long-dated gilts.

"By giving defined benefit (pension) scheme members the

opportunity to switch to defined contribution schemes, the stock

of assets held by those schemes could lead to more significant

impacts on financial markets," he wrote in a note to clients.

* June long gilt future 109.85 (-0.12)

* June 2014 short sterling 99.455 (-0.005)

* March 2015 short sterling 99.10 (-0.010)

* 10-year yield 2.70 percent (+2 bps)

-------------------KEY MARKET DATA---------------------------

Long Gilt futures <0#FLG:> Gilt benchmark chain

Short Stg futures <0#FSS:> Cash market quotes

Deposit rates Sterling cross rates

UK debt speedguide

-------------------KEY MARKET REPORTS--------------------------

Gilts Sterling

Euro Debt Dollar

U.S. Treasuries Debt reports

--------------------GILT STRIPS DATA -------------------------

Gilt strips data All gilt strips

Gilt strips IO Gilt strips PO

A list of all the strippable British gilts

($1 = 0.6014 British Pounds)

(Editing by Alison Williams and Susan Fenton)