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France sells €4 bln of inflation bonds

France sold €4 billion ($5.3 billion) of new 30-year index-linked bonds yesterday, its first sale of such securities in almost five years, to pension funds and banks seeking to protect themselves against faster inflation.

The government sold the bond with a yield of 1.875%, or 3 basis points below the rate on the prior 30-year benchmark security that matures in 2032, according to Agence France Tresor, which issues bonds on behalf of the government. Demand for the bonds reached €6.4 billion, it said in a statement. The figure compares with the level of €3 billion some analysts forecast and the €5.97 billion of bids for the previous 30-year sale.

The securities pay investors an amount linked to consumer prices in the 13 nations that share the euro. „It appeals to pension funds and it's a natural hedging instrument for banks that offer inflation-related products,” said Giles Gale, fixed-income strategist at Royal Bank of Scotland in London. „The sale went well.” The yield was in the middle of a guidance range of 2-4 basis points below the 2032 bond, according to bankers involved in the sale, who declined to be identified. The bonds offer a fixed coupon of 1.8% on top of the rate of inflation, which erodes the value of fixed-income securities. The last time France issue a new 30-year inflation- protected bond in 2002, the coupon was 3.15%.

„This is not an easy market given the volatility in the equity market last week and this week,” Benoit Coeure, CEO at AFT, said in a telephone interview from Paris. „We managed to get more than €6 billion of orders. We consider it a success.” A rout in global stock prices that started last week wiped as much as $2.4 trillion off the value of world markets. The yield on the French 30-year index-linked bond due in 2032 was at 1.88% after the sale, up 2 basis points on yesterday as of 6:30 p.m. in London. The breakeven rate, or yield gap between a 30-year nominal bond and its inflation-linked counterpart, was at 2.24%.

The UK, Italy and Greece have all sold index-linked debt this quarter to take advantage of seasonal demand from pension companies and other funds that need to hedge their future payouts against inflation. About a quarter of the new French securities were sold to asset managers, pension funds and insurance companies, and another 3% went to central banks. Approximately 55% of the bonds went to banks, according to the statement.

„The large proportion of banks reflects the development of inflation-related structured products and inflation hedging strategies of end-investors,” it said. Investors in the euro region accounted for half of the buyers, with most based in Germany. Orders from Britain made up one-third of the total demand. The proportion of US investors buying the security increased to 10% of the total, from 3% for the previous sale, according to the debt agency.

„There has been a surge in interest from US investors for euro-denominated debt,” said Coeure. „There's growing need to manage inflation exposure in the US.” Greece sold €1 billion of 50-year inflation bonds on March 1, its first such issue. The UK sold 50-year index-linked gilts and Italy issued 10-year index-linked bonds in January. The last time France issued a new 30-year inflation-protected note was in 2002.

Pension funds and insurance companies typically buy index-linked bonds as the securities compensate for inflation, which erodes the value of fixed-income securities. The coupon is paid on top of an inflation payout linked to the harmonized index of consumer prices in the euro region. Barclays Capital, JPMorgan Chase & Co, Societe Generale and UBS AG arranged the sale, along with ABN Amro, BNP Paribas, and the French bank Natixis. The settlement date is March 14. (Bloomberg)