The second-biggest holder of British bonds issued to help finance the first world war is trying to persuade the government to refinance them, arguing it can save hundreds of millions of pounds by launching new gilts with slightly tweaked terms.
Threadneedle Asset Management funds would benefit if the UK government exercised its right to redeem War Loan, originally sold to private investors in 1917 under the slogan: “Unlike the soldier, the investor runs no risk.”
But Toby Nangle, co-head of asset allocation at Threadneedle, says the taxpayer would also make a “no-brainer” windfall of £300m by refinancing, and that he would hold War Loan whether or not the government agreed. “We are quite happy holding it pretty much forever,” he said.
The £1.9bn of perpetual bonds, the most widely held gilt, have no redemption date, meaning the government only has to pay interest, not repay the original loan. The case for refinancing rests on the government’s right to repay with 90 days’ notice at the original issue value, or par.
Mr Nangle has met officials of the Debt Management Office, which manages Britain’s debt, to argue that the option to repay early is depressing the value of the bonds, adding about 0.8 percentage points to the yield, which stands at 3.8 per cent. He proposes issuing a replacement bond where the option to repay would not kick in for 30 years or more, as the then-chancellor George Goschen did in 1888 with Consols, an even older type of gilt. Holders of War Loan would make an instant 9 per cent profit, but the national debt would be cut by £300m.
The DMO described War Loan as a “legacy instrument” and said last time it canvassed investors it found “virtually” no demand for similar bonds with no maturity date. Repaying the bonds “is not on our agenda at the moment”.
“The government will not speculate on the likelihood or timing of any redemption,” the DMO said. “It would also not be appropriate for government to speculate on peoples’ motives for suggesting the redemption of War Loan.”
Mr Nangle would not say exactly how much War Loan Threadneedle clients hold, but said the total made it the second-biggest holder behind Fidelity, which has £116m of the bonds, according to Bloomberg data.
War Loan has already been bought in by the government once. In 1932, it exercised its right to repay and offered a new bond, with a lower interest rate, in its place.
There was speculation in 2011-12 that the government might repay the bonds, as falling yields amid the eurozone crisis saw the price of War Loan briefly rise above par. As eurozone panic subsided, the price fell by a quarter, but in the past year it has since risen almost a fifth, to reach 92 per cent of par.
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