Osborne to launch 100-year bonds

Osborne to launch 100-year bonds

Chancellor George Osborne is expected to launch 100-year and perpetual bonds in a bid to lock in low interest rates to reduce the future costs of servicing the government's debt burden.

HM Treasury sources said the Debt Management Office will launch a consultation as part of next week's Budget to assess the appetite for super-long bonds that never come to maturity.

The consultation with gilt market makers and funds will report back in three months, making the first tranche of any new bonds possible in the next financial year.

The longest bond term available at present is 50 years.

100-year bonds have not been issued in the UK since the end of the First World War and prior to that, in the wake of the South Sea Bubble in the 18th century.

Globally, bonds with a maturity of more than 50 years remain unusual, with Mexico and the Massachusetts Institute of Technology among the few issuers of 100-year bonds.

'This is about locking in for the future the tangible benefits of the government's credibility and the safe-haven status we have today,' a Treasury source told Reuters. 'The prize is lower debt interest repayments for taxpayers for decades to come.'

With a perpetual bond, the issuer does not repay the principal sum, but may pay interest on it for a period with no fixed end.

The Treasury has no doubt been encouraged along these lines by recent strong demand for long-dated gilts.

Mike Turner, head of global strategy and asset allocation at Aberdeen Asset Management, said the plans made sense for the government.

'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,' he notes.

'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 kick-start or resuscitate the global economy, suggest that the risk/reward trade-off offered by a 100-year gilt appears quite skewed towards the risk and less the reward over the next few years.'

This was written for our sister website, Interactive Investor


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