100 year money
March 16th, 2012
This week the UK’s announcement that the government is considering issuing 100 year bonds grabbed the headlines. The story was designed to highlight the favourable low rates of interest the UK government still enjoys when raising new funds. It also underwrote the helpful fact that UK government debt is already on average longer term than many EU countries, reducing the pressures on government as it needs less frequent refinancing. Less UK debt needs replacing each year than in comparable countries. If they do sell a decent amount of 100 year bonds, or offer more 50 year bonds, it continues to put off the day when the UK needs to replace a large amount of borrowing in a hurry.
The idea was to make this a good news story. Most will interpret it in this friendly way. However, it does serve as a reminder that the UK government is still borrowing very large additional sums. There is much muddled language around about “paying down the deficit” and about the strict austerity which is controlling the debt. The figures remind us that the debt is large and growing quickly. The government is trying to cut the rate of increase in borrowing, not to cut the debt. It reminds us just how much interest the state has to pay. Every £1,000 million of 100 year bond issued may cost taxpayers around £3,500 million in interest charges before repayment. That is all money which has to be collected in taxes sometime.
No-one knows for sure how much lower the interest rate on government debt is owing to the Bank’s Quantitative Easing programme. Given the Bank’s decision to buy up almost one third of the available stock of government bonds, you would expect that to have some important impact on the prices of the bonds, keeping yields low. The interest rates are also low owing to the deep recession the country passed through recently, and the slow rate of growth being recorded now. A rise in bond yields would signal some move towards normality. It could follow from the end of Quantitative easing and from some economic recovery.
For the time being investors are keener on riskier assets. The authorities around the world are trying to issue more liquidity into the system. The US recovery is strengthening. The Euro’s troubles have been temporarily curbed by the generosity of the European Central Bank to the EU commercial banks. There may be buyers of long dated UK government bonds out there, but history suggests you do not usually get rich by lending to western governments at 2% or 3%. It is certainly a good idea for the government to borrow as much as it can for as long as it can while rates are low, given its continuing need for hefty borrowings.
