CHRIS HUHNE, the Liberal Democrat leadership candidate, called on the Chancellor yesterday to issue more government debt to alleviate the pain caused to pensions funds by plunging gilt yields.

Mr Huhne, the Lib Dem Shadow Chief Secretary to the Treasury, said that Gordon Brown must “vastly increase” the issuance of index-linked bonds to counter a bubble that had driven real yields on long bonds as low as 0.47 per cent.

Plummeting yields pushed the FTSE 100’s aggregate pension fund deficit from £75 billion to £110 billion in the first 19 days of this month, according to Deloitte, the consultancy. Experts predicted this week that yields could slump to zero or less before the bubble bursts.

Mr Huhne said that to increase debt issuance would be a “win-win plan for the Treasury”. “It’s essential to increase the supply of index-linked gilts to protect pension funds from their problems,” he said. “But it’s also a great opportunity for the Treasury to refinance much of the national debt at very low interest rates that will benefit taxpayers for many years to come.”

Real yield is one factor used to estimate the future returns on share and bond holdings, which helps pension funds to calculate their liabilities.

Pension funds have rushed to buy long-dated gilts in order to better match their increasingly long-term liabilities. In a perverse move, these purchases have pushed up bond prices, reducing yields and deepening the funds’ liabilities.

Tim Bond, head of global asset allocation at Barclays Capital, described this as a classic self-perpetuating bubble, which was an “unintended consequence of the well-intentioned actions of actuaries and regulators”.

An increase in the number of government bonds available would help to reduce the price of gilts, forcing yields up and pushing pension fund deficits down again. It would also be an opportunity for the Government to borrow at a low rate.

Mr Huhne said: “The market opportunity will not necessarily come round again.”

Although regarded as a dark horse in the Lib Dem leadership election, having entered the Commons only last May, Mr Huhne is well known in the City.

A former financial writer for two national newspapers, he worked in the bond market for five years and was later managing director of Fitch Ratings, the ratings agency, before being elected to the European Parliament.

The Centre for the Study of Financial Innovation yesterday described Mr Huhne as “one of the most knowledgeable politicians in Westminster” who, as an MEP, went in “to bat for UK plc and the City at a time politicians at Westminster simply didn’t understand the importance of what was going on in Brussels”.

The Treasury already plans next Tuesday to issue £650 million worth of 1¼ per cent index-linked 2055 gilts. It will also issue £3 billion of 4½ per cent 2011 gilts on January 26.

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