By Richard Johnstone | 14 March 2012
Investors have reacted coolly to the idea of 100-year government bonds, which the chancellor is considering to finance borrowing.
George Osborne is expected to announce a consultation into issuing century-long gilts, double the current maximum duration, in next week’s Budget.
A Treasury source told Public Finance that the consultation would test whether there was market demand for such a long-term bond.
A 100-year issue would allow the government to secure long-term benefits from the historically low bond interest rates for taxpayers, the source added.
The current rate for ten-year government gilts is 2.26%, and 3.3% for 50-year issues, which are near record low levels.
Robert Harbron, an economist with the Centre for Economics and Business Research, said that the attempt to ‘lock in’ the historically low rates could benefit taxpayers when rates rise in the future.
He told PF: ‘A 100-year bond helps lock in this low interest rate for a long time, which is good for government finances, as they won’t pay as much in the long term than if they had to refinance and reissue bonds [at maturity],’ he said.
However, he added that it was not clear how much appetite there would be for such long-term bonds. This would be the longest maturity period since ‘war bonds’, used to finance the cost of the Second World War, were issued in 1947. These pay interest in perpetuity.
Backing for the scheme would come from the pension funds that are the ‘key buyers’ of government debt, Harbron said.
The National Association of Pension Funds said today that the 100-year repayment date would be ‘too long’ for many investors.
Chief executive Joanne Segars said: ‘A 100-year bond would be too long for most pension funds, and we don’t think that many would buy them. 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.’
Investors have reacted coolly to the idea of 100-year government bonds, which the chancellor is considering to finance borrowing.
George Osborne is expected to announce a consultation into issuing century-long gilts, double the current maximum duration, in next week’s Budget.
A Treasury source told Public Finance that the consultation would test whether there was market demand for such a long-term bond.
A 100-year issue would allow the government to secure long-term benefits from the historically low bond interest rates for taxpayers, the source added.
The current rate for ten-year government gilts is 2.26%, and 3.3% for 50-year issues, which are near record low levels.
Robert Harbron, an economist with the Centre for Economics and Business Research, said that the attempt to ‘lock in’ the historically low rates could benefit taxpayers when rates rise in the future.
He told PF: ‘A 100-year bond helps lock in this low interest rate for a long time, which is good for government finances, as they won’t pay as much in the long term than if they had to refinance and reissue bonds [at maturity],’ he said.
However, he added that it was not clear how much appetite there would be for such long-term bonds. This would be the longest maturity period since ‘war bonds’, used to finance the cost of the Second World War, were issued in 1947. These pay interest in perpetuity.
Backing for the scheme would come from the pension funds that are the ‘key buyers’ of government debt, Harbron said.
The National Association of Pension Funds said today that the 100-year repayment date would be ‘too long’ for many investors.
Chief executive Joanne Segars said: ‘A 100-year bond would be too long for most pension funds, and we don’t think that many would buy them. 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.’
