BGS’s Copper on those 100 year UK bonds. Great for tax payers, not so great for investors.
The UK government has announced that it is considering issuing 100 year gilts (or perpetuities that pay interest forever without paying back capital). Clearly Chancellor Osborne is looking to take advantage of low interest rates – this is an opportunistic move by the politicians which should benefit the British taxpayer. The key question though is whether there will be any buyers of such long dated debt?
Anyone who does buy a one hundred year bond from the UK government must believe that the UK will have a much better inflation record than in the past. Inflation is the biggest destroyer of value of fixed coupon bonds. Will an independent central bank ensure that the UK has a better record than in the past? If the UK is becoming Japan with deflation and zero growth, then a 100 year gilt may be a buy. But there are plenty of red flashing lights on inflation – oil price is at extremely high levels – Brent $125 – and the Bank of England has embarked on a massive monetary stimulus – base rate at 0.5% for three years and the Bank has indulged in a £325bn printing money / QE experiment. I am undecided on the inflation /deflation debate (despite sitting on Broker Boris’s inflation desk) but if you are thinking of buying a 100 year gilt, then you need to have a view.
The following chart shows the RPI ex mortgage rates going back to 1976:
Guest Post by John Redwood.
Mr Osborne’s rhetoric on using the IMF to prop the Euro has firmed up more. He has always said the IMF should not lend money to prop up a currency, only a country in trouble. I interpret this to mean the IMF should not lend to any Euro member, as that would in my view be lending to prop a currency. Mr Osborne may define it less severely.
Now Mr Osborne is saying the UK should not make more money available to the IMF to lend to Euro members, unless and until France and Germany have made a larger contribution. He seems to have in mind those states putting more money into the European bail out fund. This is extremely unlikely. Germany thinks the problem countries should do more to rein in their own deficits. France is becoming financially strained herself and is not looking for more ways to spend money. That would seem to mean no more UK money for these purposes, which would be excellent news.