UK government considers launch of 100-year bond – UPDATED

UK chancellor George Osborne is considering launching a new super long dated gilt running with a maturity of 100 years, according to reports.

In the UK Budget delivered next week Osborne (pictured) is expected to float the idea and start a consultation on whether a 100-year bond, or possibly one without any redemption date, could be launched.

Launching the bond now would enable the UK government to borrow when interest rates are at record lows, helping to manage down the country’s debt over the long term.

A consultation will likely assess whether there would be any demand for such an issue, and that would be crucial to its success.

Currently most long-term debt has a maximum maturity of 30-years, and although a 50-year gilt was launched in 2005 the issuance was tiny compared to the 10, 20 and 30-year gilt markets.

The last time such a long-dated bond was launched was in 1932 when the government launched the 3.5% War Loan.

These bonds, which have no fixed maturity and are classed as undated, still trade today, paying a dividend once a year. Around £2bn worth of war loans are in the market, just a fraction of the £1.2tr of total outstanding debt.

The UK Treasury has forecast a 100-year note would save the country £20bn in debt interest over the next five years alone.

 

This article was first published on Investment Week

 

UPDATE – Mike Turner, head of Global Strategy & asset Allocation at Aberdeen Asset Management, said: “The issuing of a 100-year bond or a perpetual makes financial sense for the government. It can take advantage of current historically low level of interest rates to price debt that either does not need to be paid back for 100 years or will never need to be repaid for perpetuity.

“This is nothing new, as similar securities have been issued before when government finances have been under significant strain, such as in the aftermath of the World War I. However, whether they are an attractive investment is a different question. They do 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.

“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 appear quite skewed towards the risk and less the reward over the next few years.”

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