Index Linked Gilts - C for financial management

The recommendation by the ONS not to alter the calculation of RPI for index linked products is common sense. This is good news for both investors and the Treasury. Investors had bought RPI protection and it was disingenuous to consider that the index should be recalculated on any other basis. Not least because the motivation to re-calibrate the calculation appears to have been driven by the Treasury’s desire to cut financing costs. A laudable objective but in this case one that could have backfired badly. The effective reduction in coupon and principle repayments would have damaged trust in UK government debt. This would have gone against every sound practice in bond markets and would have achieved only short term gains at the expense of increased future financing costs. Whilst investors should feel happier it does leave a bad taste. There appears to have been genuine support at senior levels to rebase linkers and this affected their trading price. In the future could a cash strapped Treasury re-float the idea? Maybe.  There are now to be four different measures of inflation in the UK. In this respect investors should be aware they are running short option position. Out of the money for the moment but who knows what will unfold in the future? This whole saga around linkers leaves me with a worrying thought. The linking issue has been around for over a year. Why didn’t the Treasury bury it long ago? It’s as if Noddy was in charge. Grade C.