"You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time."
There may be some doubt as to who first made the remark, but it is one that Chancellor, George Osborne, should perhaps heed as he contemplates issuing gilts with a 100-year term or indeed, undated paper.
We currently have historically low interest rates and the Bank of England has been artificially holding down Gilt yields by buying government bonds via a succession of Quantitative Easing schemes.
We have managed to hang on to our AAA credit rating status whilst nine of the Eurozone nations, including France, have been downgraded and this has allowed the UK to borrow at record low levels of interest and become a beneficiary of safe haven inflows emanating from the Eurozone debt crisis.
North's John Husselbee contemplates the Treasury's plans for 100yr gilts
Bond investors continue to perceive Gilts, despite the negative real yield, to be relatively attractive, whilst the Coalition maintains its commitment to eliminating the UK’s deficit, and retains control of both our monetary and fiscal policy.
That the cost of the UK’s borrowing has been kept so low for so long is a result of a number of factors, some of which are in the control of Mr Osborne, others which are not.
However, to interpret the current position as a sign of confidence in his handling of the UK economy and to issue ultra long dated debt on the back of this is, verges on foolishness.
He is potentially “Doing a Ratner!”. Many will remember Gerald Ratner’s over-confidence when he bragged about the ease of selling cheap jewellery to gullible shoppers.
This was the technique employed successfully by the popular chain of high street jewellery shops for many years until Ratner’s commercial gaffes almost led to the company’s collapse.
So, do I really think that George Osborne is in danger of committing a similar folly in issuing or even suggesting the issuance of 100 year or undated gilts?
Whilst I can see the appeal of being able to lock into historically low interest rates, I don't see investors being attracted by such low yields with the threat of higher inflation looming.
Of late the major buyer of Gilts has been the Bank of England. I doubt the Pension Funds, that have traditionally represented a major source of demand for long dated issues, would be interested in issues beyond the next thirty years unless the regulatory environment forced them down that path.
Although ultra long dated debt is not something new for the UK, the last issuance back in 1932 was in the form of a War Loan to help cover the cost of the First World War, I am pretty sure there would be little appetite today to help cover the cost of bailing out the banks.
My personal preference would be to invest in a well-managed bond fund, although I wouldn't rule out trading in and out of a 100 year gilt in future years at the right price.
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