UK gets strong demand for inflation-linked debt as global markets convulse

By Andy Bruce

LONDON, Feb 6 (Reuters) - Britain received strong demand

from investors when it sold several billion pounds of 30-year

inflation-protected debt on Tuesday, as global market ructions

sparked by fears of faster U.S. inflation deepened.

Investors placed orders worth 16.3 billion pounds ($22.7

billion) for the 0.125 percent 2048 index-linked gilt

at a syndicated sale. This allowed the UK Debt

Management Office (DMO) to raise around 4.5 billion pounds

through the sale of gilts with a face value of 2.75 billion

pounds.

The gilts were sold at a real yield of -1.475 percent, the

third lowest on record and an indication of robust demand. The

DMO said domestic investors accounted for about 85 percent of

demand, as is usual for this type of gilt.

"We have seen a very pleasing conclusion to our 2017/18

syndication programme today," DMO chief executive Robert

Stheeman said. "This was a very smooth and well-executed

transaction attracting high quality demand from our core

domestic investor base."

The sale pushed up real yields slightly across the

longest-dated British linkers as prices fell while the market

digested the issuance, compared with price rises for

shorter-dated debt .

In the wider market, conventional gilt yields fell sharply

along with those for German Bunds and U.S. Treasuries as equity

prices took another dive.

The current bout of market instability stems from strong

U.S. wage data last Friday that fuelled expectations of higher

inflation and interest rates.

While that initially hurt bond markets, the scale of the

drop in equities this week has sent investors heading back to

the safety of fixed-income assets.

Societe Generale (Swiss: 519928.SW - news) fixed-income strategist Jason Simpson said

the latest rally in gilt prices implied markets now saw less of

a chance that the BoE (Shenzhen: 000725.SZ - news) would raise interest rates in May.

No economists polled by Reuters last month expected the BoE

to raise rates at this week's meeting, but an increasing number

saw a chance of a May move and Simpson said financial markets

had priced in a probability of as much as 70 percent.

The BoE indicated in November that it would probably need to

raise interest rates twice more over the next few years if

Britain's economy developed as expected.

"(Yields) had been pricing in a 60-70 percent chance of a

May rate hike -- I just don't buy it, I don't think the Bank of

England would change their tune so quickly," Simpson said.

"I think people have maybe had a step back after seeing

equities wobble, and there are still a lot of risks out there."

He pointed to a renewed lack of clarity from Britain's

government about its ultimate objectives when it leaves the

European. "There's still a very confused picture, that's induced

a little of bit of instability around (Prime Minister Theresa)

May's premiership," Simpson said.

Ten-year gilt yields fell 4 basis points on

Tuesday to 1.52 percent.

The yield spread between 10-year British and German

government bonds rose to 82.7 basis points, around a

basis point wider on the day.

BofA Merrill Lynch, JPMorgan (LSE: JPIU.L - news) , Lloyds Bank and Santander

acted jointly as bookrunners for Tuesday's syndicated linker

sale.

March long gilt future 121.93 (+0.53)

June 2018 short sterling 99.29 (+0.01)

Dec (Shanghai: 600875.SS - news) 2018 short sterling 99.09 (+0.02)

10-year gilt yield 1.52 (-4.1 bps)

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

Long Gilt futures Gilt benchmark chain

Short Stg futures 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

($1 = 0.7172 pounds)

(Editing by Catherine Evans)