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Or, taking consols, the War Loan, and all that UK sovereign debt jazz into the 21st century.
The latest from the Chancellor of the Exchequer ahead of the UK’s March 21 Budget, according to Wednesday’s FT (and leaving SocGen’s Julian Wiseman prescient):
Mr Osborne will announce plans for the Debt Management Office to test market appetite for "super-long gilts" of 100 years or more, designed to cash in on investor confidence.
He also wants to test the case for launching "perpetuals", bonds that pay interest indefinitely, with the principal never being repaid.
The "Osborne bond" would follow a tradition of naming perpetual or ultra-long securities after chancellors. Just after the second world war "Dalton bonds", which were perpetuals, took the name of Hugh Dalton, the then chancellor.
Then again, Dalton bonds flopped.
They were creatures of true “financial repression”, not the weaksauce varieties we get today. Britain was broke as a sovereign debtor in 1946. Dalton directed the Bank of England (which he nationalised in that year) and private banks to prop up bond prices. The Chancellor then stopped issuing medium-term debt, before issuing perpetual securities with a 2.5 per cent interest rate. Investors didn’t bite and fled to higher-yielding… railway stock. Government bonds yielded three per cent within a year. Dalton had lost his battle with the market. He was eventually to resign after leaking advance details from a Budget. It wasn’t a done thing in those days. Different world.
There’s been a similar warning about issuing 100-year gilts in the 2010s (for now, let’s leave perpetuals to one side). The argument goes that few investors will seriously accept the sub-inflation returns involved over such a long period; and doing so would simply be financial repression. Well, we disagree.
Nor do we think a 100-yr gilt is simply about the UK fiscal equivalent of willy-waving (although what Chancellor of the Exchequer doesn’t like to make a grand gesture to demonstrate he has the supreme confidence of world markets? etc).
We’ll begin by pointing out that there is a space being kept warm for a 100-year bond on the current UK yield curve. One of the longest-dated UK government bonds in issue, the 4 per cent 2060 gilt, was only issued in 2010. And investors love 50-year and 30-year gilts. They love to buy them and hold them, and also to pick up the inflation-linked gilt counterparts. Recently they have even accepted negative real yields. Why? Because they tend to be eg. pension funds who have to match assets to liabilities in their investment portfolios. As Julian Wiseman also pointed out in advocating a century bond, a 100-year gilt might also help liquidity in the current long end.
Maybe the Chancellor should even be unveiling a 100-year linker as more useful, although we’ll leave that to be fought out in comments. The post-crisis flight to capital preservation also plays a part, eg .when sterling institutional investors hold the least proportion of UK equities since 1963.
So it will be interesting to track the debate in the DMO’s usual consultations with the market-makers in gilts, which is where we’d expect “testing the case” would start. For example, current long-dated gilts might suggest a 100-yr gilt would yield around 3.5 per cent, if issued. In any case a 100-yr gilt is not a bolt out the blue for the market in UK government debt.
Then there are perpetual gilts, such as the 1932 War Loan.
These get a strangely bad rep for a venerable 0.2 per cent of the British national debt. A decision by the government to issue a fresh perpetual bond would be interesting then – after all, low rates have been given as a reason to retire the War Loan and possibly even older consols, since now is the first time in 80 years that this would be profitable for taxpayers. The government could issue debt at a lower rate than the War Loan’s 3.5 per cent coupon.
It’s hard to imagine how investor demand for a perpetual would pan out. You can see it as like a 100-yr gilt (with the same problem from inflation) but there are a few features that make it different. Some are bad; perpetuals aren’t as liquid, and as M&G’s Bond Vigilantes pointed out back in November, you can debate whether a perpetual bond’s ‘true’ maturity is ‘forever’, or the next date at which the bond is callable (as they usually are).
Some of the other features might be good: a perpetual bond is literally unbeatable as a duration asset, ie. its value will appreciate the more yields go down in general, compared to any dated bond.
But who thinks yields might go down any more?
Related link: Mr Osborne’s plan for a super long bond – FT
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