George Osborne has convinced the world that Britain is a haven from turmoil. The economy may be ravaged by unemployment and broken banks, but government bonds, or gilts, are seen as safe.
Keynesians want government to exploit low yields to borrow and spend. The obvious drawback is that the market might lose faith, while the government would lose face.
Mr Osborne has a different plan: a super-long bond. Borrow for a century, or even for ever, and there is less risk of Britain being hit by a refinancing crisis. The UK can use its current standing to secure cheap money for the next 100 years.
There is also an opportunity for Britain to set a global benchmark as the only country with a large “century” bond (Mexico has a small foreign currency issue of $1bn).
A perpetual bond, which never matures, is also an option. This might appeal to Mr Osborne’s ego. Treasury officials point out that some bonds have been named after their creators, although the most famous – War Loan – was not dubbed the Chamberlain.
A perpetual is not such a good idea. As Julian Wiseman at Société Générale points out, perpetuals are excluded from many index-tracking portfolios, reducing demand. They have little financial advantage either, because income 100 years hence has little value today, making a perpetual almost identical to a 100-year.
War Loan shows what investors in a super long-dated gilt can expect. After being created in a bond swap driven by a blaze of publicity in 1932, it plunged in value. Only recently has it approached its issue value – but, inflation-adjusted, £100 invested then is worth just £1.74 now.
Gilt yields, along with those of US and German bonds, are artificially low because of official buyers, bank rules, pension fund trends and a weak economic outlook. These can last decades if deflation takes hold, as Japan shows. But surely not a century
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