The UK should issue a 100 year bond (Gilt)

Sometimes ideas come to fruition at the time but others have a much longer gestation period. My subject of today is an example of the latter as it was back in March 2012 that Chancellor George Osborne included this in the UK Budget.

In light of evidence of strong demand for gilts of long maturities and against the backdrop of historically low long-term interest rates, in 2012–13 the DMO will consult on the case for issuance of gilts with maturities significantly longer than those currently in issue, that is in excess of 50 years, and/or perpetual gilts.

By DMO he meant the Debt Management Office which is the body which manages the UK’s national debt. The plan was for it to do this.

The consultation will build an evidence base to inform the Government’s decision on whether to issue such instruments. It will seek to establish the likely strength and sustainability of demand, the cost-effectiveness and risks of issuance, and the impact on market liquidity and the good functioning of the wider gilt market.

If we look at the plan back then we see it was based on “historically low long-term interest-rates” or bond yields. That was true in March 2012 with longer maturity Gilt yields having fallen by a bit more than 1%. If you compound that over 100 years then you would be quids in so to speak as an issuer.

Investment Week

They held an online debate and Jim Leaviss of M&G told us this.

Few fund managers would publically argue that a yield of supposedly around 3.5% is good value given both inflation and political uncertainty over 100 years.

Such things are a hostage to fortune as it has turned out that any fund manager who had bought such a bond would be giving a lecture tour right now on how clever they had been, as well as deserving a large bonus. We should not be harsh on Jim as who could have predicted the last 7 years.

Currently, we are not bullish on the gilt market: it looks expensive and I am not sure you would want to lock in low yields for such a long time period.

Oh well as Fleetwood Mac would say. He did think that a 100 year Gilt would be bought in spite of that being a bad idea.

However, there has been demand for long-dated gilts given the size of the existing 2060 gilt and the 2062 linker of over £16bn and over £8bn respectively.

If a 2112 is issued, its very existence will cause index-led funds or liability matching pension funds to buy it.

Not everyone in the debate felt that it would work and others thought that the Gilt market was already too expensive. Here is Jeff Keen of JO Hanbro.

Assuming the Bank of England is successful in meeting its 2% inflation target, this implies long term gilt yields should be in the 4%-5% range rather than the currently implied yield for a 100-year gilt of around 3.5%. The difference is a downward price adjustment of around 30%. Beware – gilts are not necessarily a safe haven.

Apologies for embarrassing them.

What happened next?

There was no explicit issue although in 2015 we did covert something into a 100 year bond. From gov.uk.

The Treasury will redeem the outstanding £1.9 billion of debt from 3½% War Loan on Monday 9 March 2015.

The reason for that was the 3.5% coupon which in 2012 had seemed cheap was by then looking rather expensive for the UK taxpayer.

Austria yesterday

You may recall that Austria issued a century or 100 year bond back in 2017 well there is more of it now.

They also revised pricing lower for a tap of Austria’s outstanding debt maturing in 2117 with demand there exceeding 5.3 billion euros. That 1.25 billion euro issue priced at 48 bps over an outstanding Fed 2047 bond, translating to a yield of 1.171%. ( Reuters)

Yes you did read that yield correctly and as pointed out in the comments yesterday there was another sign that it was an issuers party for the Austrian taxpayer.

The country’s debt management agency launched the sale of 3 billion euros of five-year bonds at 23 basis points below the mid-swap rate, translating to a yield of -0.435%. The deposit rate stands at -0.40%.

There was a time when the ECB deposit rate was a barrier for bond yield issuance but as you can see that is now in the past. The bull market for bonds is so strong that it has passed the benchmark and if Germany issued a five-year bond it would blow it away at around -0.6%.

Another sign of how strong the bull market is in bonds is that there was plenty of extra demand for the two issues by the Austrian Treasury. As its overall yield is 2.08% it has improved conditions for the taxpayer there with both issues.

The UK Gilt Market

This has also been in a bull market where yields are both absolutely and historically low. We do not have the levels of much of the Euro area for several reasons. Firstly official interest-rates are lower there with the deposit rate being -0.4% as opposed to the UK Bank Rate of 0.75%. Next we have had ECB President Mario Draghi only recently hint about even lower interest-rates and more QE bond buying. Also with the planned TLTRO money market ( bank subsidy) operation it is in the process of enforcing them.

But we do have very low yields as for example both the two and five-year yields seem to have settled around 0.6%. If we look further out we do have a fifty-year Gilt which yields some 1.38% as I type this. So what is called our yield curve is pretty flat both as a curve and also in comparison with the past.

Comment

This seems clear cut to me as at present yields the UK could issue a 100 year Gilt very cheaply. There are loads of projects which would look extremely viable at these levels. If you are wondering how much? Well even if we issued at the fifty-year yield of around 1.4% that would be 2.1% below 2012. Actually if you look at the way the yield curve shapes we might be able to issue at a yield of 1.3%. Amazingly cheap and less than a tenth of past yields experienced in my career.

The flip-side of the coin is that at such a yield the percentages are heavily weighted against any buyers. So buyers of fixed-income funds might do well to be afraid and perhaps very afraid. It is a bit different for holders who have been in a long running party.

As to size well if you do it why not offer £10 billion and see what happens? I would not be surprised to see it be over subscribed.

Meanwhile every idea has its niches. From PolemicTMM.

UK should issue a 100yr zero coupon 42bio Euro-denominated bond to fund the Brexit bill (if bond mkts continue like this, we may even get -ve rates). EU institutions would end up having to buy it due to EU imposed reserve regs and so effectively end up funding Brexit.

By bio he means billion I think. The quid pro quo for an even lower interest-rate would be an exchange-rate risk.

The Investing Channel

 

13 thoughts on “The UK should issue a 100 year bond (Gilt)

  1. 100 years would be about the operational life and decommision for a Nuclear Fission Power Station. Yet we supposedly need to get private foriegned/state owned businesses to fund this.

    • Ah, well the difference is that if the private sector builds it then they have to shoulder…all…the…risk…er. Forget I said anything.

    • Thank you but my eye’s today have been on the price action in Bitcoin which filled the Bowl Theory pattern to a T. The low of the day has been US $10388 after US $13,242. That’s what you call volatility….

  2. Do not even think of shorting Boeing stock. It’ one of the precious. There’s a high statistical correlation a large short position will develop, then they will pull it back the other way!!
    Beware!! Toxic!!!!!!!!

  3. Hello Shaun,

    don’t these gilts affect pensions , so we could see more hazards for those who need help at the end of their working career . big student fees, big mortgage debts , forced into low if not negative pensions schemes , what could go wrong?

    Forbin

    The first cut won’t hurt at all
    The second only makes you wonder
    The third will have you on your knees

    • Hi Forbin

      Cheers for the link as I have always liked that song. I looked it up on YouTube a few months ago and found a recent live performance which shouted she still has that haunting sounding voice.

      I think it was Andy Z who made the point about pensions a while back as we entered the era of considering 0% and maybe negative returns. It also makes annuities very expensive. Or to put it another way it is another left hook to the solar plexus of defined benefit pension schemes.

  4. Great blog and video as usual, Shaun. If there were a 100-year gilt issued in the near future, it should be linked to the RPIJ, and not the RPI, the CPI or the CPIH.
    In Carney’s testimony before the TSC yesterday, Alison McGovern mentioned ONS projections of a lower number of migrants to the UK due to reduced numbers from other EC countries. So far, migration numbers are above what the ONS thought they would be, according to McGovern, because increased migration from non-EC countries had offset the correctly anticipated decrease in EC numbers. She wondered if the Bank of England had taken this into account in its own projections. McGovern’s previous line of questioning had mostly related to wages, so you would think Carney would have stayed on theme, and said something about the wage impact. The wage implications would presumably be different if Polish migrants were being replaced by Pennsylvanians or Pashtuns, but if Carney knew where the drop in EC migrants was coming from, or the increase in non-EC migrants, he had nothing to say about it. The American labour economist George Borjas postulates that a 10% increase in a particular skill group implies at least a 3% decrease in its wage, so concerns about the numbers and backgrounds of migrants are not idle. Carney responded more like a politico than an economist, simply ignoring the wage implications, and noting that an increase in migration numbers increased demand and therefore tended to increase the inflation rate. He chose to ignore migrants’ impact on supply, including the supply of labour. The migrants’ skills meshed with Britons’ needs, blah, blah, blah. You would think he was in the running to be the next PM.

    • Hi Andrew and thank you

      I was thinking of conventional Gilt to last a century and to yield around 1.4% as I think that when you push the boundaries it is best to keep it simple. However I was involved in a social media discussion where some market players suggested between the 30 and 50 year mark in index-linkers would be a good place to issue.

      That is where your point comes in because we simply do not have official consumer inflation measures which are reliable over such a term.Because of the way it has not been updated there will be issues and problems for the existing 50 year RPI linked Gilt. I agree both CPI and CPIH are inappropriate and the RPIJ was dropped.

      The last 7 years have been so much “wasted time” as the Eagles would put it as we have done our best to go backwards. The Euro area is no better as it is stalling any effort to put owner occupied housing in its measure.

  5. 100 year UK gilt? Why not? If a serial defaulter like Argentina can get away with it, there are suckers to be taken(unfortunately those suckers are likely to be those who rely on pension in years to come from their meagre earnings, but of course no fund manager would get the sack for buying a UK gilt would they? But that is exactly what should happen to an investment manager or allocation committee that advises buying UK debt.

    Look at what a disastrous investment War Loan has been over its years, the UK government and Bank of England laughably brags that it has never defaulted on its debt, yet in 1932 the original War Loan gilts were rolled over and re-issued with a smaller coupon as the country could not afford to pay the higher rate – I’d call that a default, even more farcical was the slogan used to sell the original debt “unlike the soldier, the investor runs no risk!”.
    Why not add in the numerous devaluations of sterling since WWI and include them as defaults as well? At the start of WW! cable was 4.70 today it is 1.27 a fall of some 73%, and that is against a currency that has also been relentlessly devalued since the formation of the Fed in 1913, they reckon a dollar in 1913 has the purchasing power today of around 3 cents. So shall we say a cent for a pound??? A loss of some 99% in 100 years.

    Talking of the dollar, many ascribe its position as reserve currency to the fact that the US government has also never defaulted, but like the UK government they have achieved this status falsely as they have also defaulted on numerous occasions, in 1932 FDR changed the law to allow the government to renege on its previous commitment to repay the principal on US treasuries in gold, he also revalued the dollar against gold from $20.67 to $35 an ounce, Nixon famously closed the gold window in 1971 after the French persistently kept asking for physical gold for its Treasuries on maturity, and the petrodollar was born, backed by nothing but faith in the US government and the agreement reached by Kissinger with the Saudis to recycle their vast oil revenues into US treasuries, ever since inflation has been allowed to run amok as there is nothing stopping governments printing money to fund any crisis or deficit.

    So everyone can marvel at how governments such as ours can borrow at virtually no cost, but when you think about the type of politicians we have nowadays, it is just frightening to think of what will happen when they get their hands on it.

    • ” it is just frightening to think of what will happen when they get their hands on it.”

      what do mean WHEN?

      ehehehe

      Forbin

      I’ll take all they can give me
      And then I’m gonna ask for more
      ‘Cause the money’s buried deep in the bank of England
      And I want the key to the vault

      I’m gonna take your money
      Count your loss when I’m gone
      I’m alright, Jack
      I’m lookin’ after number one

  6. Pingback: My thoughts on the IFS Green Budget for the UK | Notayesmanseconomics's Blog

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