Investors Wary Of 100-Year U.K. Bond Plan

Terry Flanagan

U.K. chancellor George Osborne is expected to announce in next week’s budget that he is to revive the idea of 100-year government bonds as a way of locking into the historic low interest rates currently on offer for government borrowing.

Currently, the average duration of the U.K. government’s £1 trillion debt is around 14 years with maturities ranging from just a few months to the longest a 50-year bond offered in 2005.

However, many institutional investors—who, traditionally, are some of the biggest buyers of government debt—are skeptical about the plans.

“A 100-year bond would be too long for most pension funds, and we don’t think that many would buy them,” said Joanne Segars, chief executive of the National Association of Pension Funds, which represents 1,200 UK pension schemes with assets totaling £800bn.

“Most final salary pension schemes are now closed to new joiners and are becoming more mature. Their liabilities are long-term, but not that long-term.

“Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the government issue more of those. Even if a 100-year bond were attractive in duration, there would be a question mark over whether it would yield a strong enough return for investors.”

The U.K. is looking to exploit the low interest rates on offer and its safe-haven status by issuing these long-dated bonds—as well as possibly perpetual bonds—to reduce the costs of servicing the government’s debt burden. Average 10-year gilt yields stand at 2%.

“The issuing of a 100-year bond or a perpetual makes financial sense for the government,” said Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management, an investment manager based in the Scottish city of the same name.

“However, whether they are an attractive investment is a different question. They do, of course, offer certainty and balance to arguably more volatile assets, such as corporate bonds and equities, and there will be demand from banks and pension funds.

“But history has also shown that when debt issuers attempt to lock in such low levels of short term interest rates in perpetuity or for extremely long periods that it could be a sign of the bottoming out of the interest rate cycle. Certainly the risks now being taken with monetary policy in an attempt to kickstart or resuscitate the global economy, suggest that the risk reward trade-off offered by a 100-year gilt appear quite skewed towards the risk and less the reward over the next few years.”

The U.K. has not issued 100-year bonds since the end of the First World War to pay off its huge debts from the Great War and, prior to that, when the South Sea Bubble burst in 1720, causing financial ruin for many in the country. Globally, bonds with a maturity of over 50 years are unusual, with Mexico and the Massachusetts Institute of Technology, a U.S. university, among the few issuers of 100-year bonds.

The Debt Management Office will launch a consultation alongside next week’s budget to gauge the appetite for super-long bonds of 100 years up to gilts that never come to maturity, after initial discussions with investors proved positive.The first tranche of any new bonds could be issued in the next financial year.

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