It lends new meaning to the long-term view. The UK’s announcement that it is looking at issuing 100-year bonds, or even perpetual debt that will never mature, has caused a stir among investors.
If the plans for a century bond are approved following a consultation process to be unveiled in next week’s UK Budget, then it would be the first triple A rated sovereign debt issue of its kind.
There are a few precedents. Mexico, the Dutch bank Rabobank, the French power company GDF Suez and the Massachusetts Institute of Technology have all issued 100-year debt. The UK itself issued perpetual bonds to pay for the first world war and the South Sea Bubble in the 1700s.
Yet the initial reaction to the initiative proposed by George Osborne, the UK chancellor, has been less than lukewarm, at least among those who matter. Pension funds, considered by some to be natural buyers of such “super” long-dated securities, warn their appetite may be thin.
Joanne Segars, chief executive of the National Association of Pension Funds, says: “My members would not want such long bonds. They need inflation-linked products of maturities between 30 years and 50 years as most pensions are now closed to new people.”
Others suspect the chancellor of chasing publicity, keen to exploit the UK’s status in the markets as a relative haven from the recent eurozone turmoil.
Jim Leaviss, head of retail fixed interest at M&G Investments, says: “Is this a gimmick to grab the headlines? We are not bullish on the gilts market and don’t see the value in buying something that is so expensive. I would not want to lock in such low yields or returns for such a long time.”
There is also a worry that yields are unlikely to fall much further, making now the wrong time to lock in such low rates, especially as the UK haven status from the eurozone may have run its course and the Bank of England’s “quantitative easing” bond-buying programme could be nearing an end.
Indeed, gilt yields, which move inversely to prices, suffered their biggest one-day rise this year on Wednesday after the Federal Reserve’s relatively upbeat assessment prompted investors to reduce bets on more monetary easing in the US.
The plans, though, have captured the imagination of some, particularly in an ageing society where living beyond 100 is no longer considered unusual. The move makes sense from the UK government’s perspective.
Although it would not alter the fiscal outlook much – and would even raise average borrowing costs for the government as short-term yields are extremely low – market participants say that an issuer should try to issue at the lowest rates for as long as possible. Right now, the average yield of long-term government debt beyond 30 years is at historic lows of 3.7 per cent, compared with 4.5 per cent in 2000, according to the Debt Management Office.
The consultation could also reassure investors that, despite the UK’s own fiscal challenges, it remains a relatively safe prospect compared with other countries, having a long average debt maturity of 14 years, twice that of Italy and France. That reduces refinancing risk.
For the time being, the DMO is keeping its options open on the likely maturity. It could decide on bonds of more than 50 years, including a century bond or perpetual bonds, or reject the plans altogether.
Robert Stheeman, head of the DMO, says: “It is possible we may get some interest from the traditional investor base such as pension funds and insurance companies, and there may also be international interest from investors seeking to diversify through new instruments.”
The DMO could limit the issue if demand proves weaker than hoped. Investors estimate £1bn to £5bn could be raised first time round, with additional issuance coming later.
Debt managers say a small amount could comfortably be raised if higher yields were offered. Initially, a century bond or perpetual would probably price at about similar levels to the longest existing conventional bond in circulation, which matures in 2060 and is trading at 3.37 per cent.
Julian Wiseman, head of UK rates strategy at Société Générale, says: “Investors will buy these bonds. The DMO does not necessarily have to issue a big amount and it would be the only triple A century bond out there, which could increase demand.”
Mr Leaviss, while sceptical, believes the bonds may appeal to some asset managers. Some pension funds may like the idea of “super” long bonds or ones that never mature to match their liabilities.
“We live an age where people are living to well over 100 years, so from that point of view, longer-dated bonds make sense – if not for pension funds, then certainly for insurers and possibly other fund managers.”
Some say hedge funds and sovereign wealth funds may be interested too. For others, the fact the UK is considering such long bonds underlines the attractiveness of gilts as one of the few remaining “safe” investments in a world of diminishing triple-A products. This is in contrast to countries such as Italy and Spain, the two large peripherals at the centre of the eurozone crisis, which have shied away from issuing bonds beyond 10 years in 2012 because of difficulties in attracting investors for less liquid, longer-dated securities.
Alan Wilde, head of fixed income and currency at Barings, says: “We don’t like gilts because they’re so expensive, but in 100 years the UK is still likely to be here and you’re still likely to get your money back. You can’t say the same for many other securities.”
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