Things That Make You Go Hmmm... Such As A "Fiscally Credible" UK And Its Upcoming 100 Year Gilts

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From Grant Williams' latest Things That Make You Go Hmmm...

The popularity of Liability Matching amongst UK pension funds has all but guaranteed a disastrous outcome for a generation of ‘savers’ as rates have been held artificially low in a highly inflationary environment but perhaps the biggest ‘tell’ that the status quo cannot possibly go on for much longer came last week when George Osborne tabled an idea not used since the aftermath of WWI - 100-year gilts:

(UK Daily Telegraph): Britain is to offer 100-year gilts, meaning current Government borrowing will not be repaid until the next century, ...


The Chancellor hopes that the 100-year gilts will help to “lock in” the benefits of Britain’s international “safe haven” status. The interest rates paid by the Government to borrow money have recently fallen to a record low and it is hoped the new gilts will mean “our great-grandchildren” can benefit from the low rates.


Currently, the average duration of the Government’s £1 trillion debt is around 14 years – with maturities ranging from months to a 50-year bond issued in 2005. Longer-dated debt is widely thought to offer a country more stability.


A Treasury source said tonight: “This is about locking in for the future the tangible benefits of the safe haven status we have today. The prize is lower debt interest repayments for decades to come.


“It is a chance for our great-grandchildren to pay less than they otherwise would have done because of the government’s fiscal credibility.” 


Firstly, Britain’s ‘safe-haven status’ is a fallacy. It is no more safe than many of the other major economies who are choking on debts that cannot be paid off. The only reason it HAS that status currently is because of the very Achilles Heel that will ultimately prove to be its demise - the ability to print its own currency. By NOT being a part of the euro experiment, Britain has kept control of its fate and has been able to print its way out of trouble - so far - while its neighbours to the east have all been lashed to the deck of the same sinking boat, but the day is coming when Britain’s profligacy will become important again. As I keep saying; none of this matters to anyone until it matters to everyone.

Secondly, interest rates may have ‘fallen to a record low’ but they have done so in the same way heavily-indebted gamblers often ‘fall’ from hotel rooms - with a big push (only this time from the Bank of England and not a guy called Fat Tony). Like US Treasurys,  the price of UK gilts would be nowhere near these levels without a captive and very friendly buyer in the shape of the central bank.

And then there’s the ‘treasury source’ who spoke of ‘locking in for the future the tangible benefits of the safe haven status we have today’ before finishing with a flourish when he tugged at the heartstrings of investors by referring to great-grandchildren who would be paying less in interest repayments than they otherwise would have done because of (and I’m going to give this last comment the space it deserves;

“...the government’s fiscal credibility”

I have yet to find anything remotely credible about the UK governments fiscal policy - it’s marketing policy, yes, but fiscal policy?  Not so much.

Clearly, any government looking to lock in rates for 100 years is supremely confident of two things:
1: Rates are as low as they are going to be for 100 years
2: They have suckers at the table willing to lock those rates in for that length of time.

But a funny thing happened on the way to locking in for the future the tangible benefits of the safe haven status Britain enjoys today - the once-in-a-lifetime offer received withering criticism:

(Jeremy Warner): ...from the investors’ point of view it makes no sense whatsoever and if it ever comes to pass, I can guarantee it will eventually be seen as one of the most colossal cases of mis-selling ever seen in the UK – and there have been quite a few.


As any student of economic history knows, periods of very low interest rates can last an awfully long time, but they have never lasted 100 years or anywhere close. Any such gilt is therefore a hostage to long term fluctuations in interest rates and inflation. One thing is absolutely guaranteed – inflation adjusted, £1,000 invested in a 100-year bond today, even with interest re-invested, won’t be worth anywhere close at maturity.


Anyone who invests is therefore more or less agreeing to a long term loss, or to a net transfer of part of his wealth to the Government.

Warner went on to examine how the last buyers of 100-year gilts made out:

From the Government’s point of view it was a masterstroke which transformed the public finances, but it was a disaster for  investors. The new stock immediately plunged in value, yet the real damage was to come later from the value destructive effects of
inflation. £1,000 invested in the War Loan back then would in today’s money be worth less than £20.

The National Association of Pension Fund Managers were similarly scathing:

(FT): The National Association of Pension Funds on Wednesday criticised the chancellor’s plans for an “Osborne bond” – a 100-year debt issue or even a perpetual gilt that never matures – saying it would prefer shorter maturity debt that was protected against inflation.


One senior UK fund manager said: “This could be of interest for pension funds as it would be a good match for their liabilities.” But another said: “We would not be buyers of this debt because the yields are too low. It would be great for the government and the British taxpayer, but I don’t think we would want to lock in yields so low for such a long time. Yields are artificially low because of the Bank of England’s quantitative easing initiative.”

And it is in this reaction that the writing on the wall for government bonds becomes clearer still.

We have reached the point where investors are comfortable enough that the fear of a systemic collapse has now more or less dissipated and faith in a resumption of growth (at least in the US) is slowly returning (though I have my doubts about that being the case but more of that another day). It was precisely this fear that drove them into government bonds in the first place but now that they have started to care once again about such trivial matters as price and yield, there is only one price-insensitive buyer left in the game - and that buyer (at least in the UK) only has £25 billion in his pocket. Sounds like a lot of money, huh? It used to be.

And so, Greece and Spain fail to reach the limits imposed by the fiscal compact, now it’s Holland’s turn and the UK couldn’t get near it even if it WERE a signatory. Portugal is sinking rapidly into the swamp and this week Ireland, poster child for austerity, has announced that it has slipped back into recession.

Anybody out there think we have heard the last of this whole ‘Europe thing’?

Me either.

Of course, if Europe WERE to completely collapse, just think how low yields of government bonds would be...


Full TTMYGH report


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Sun, 03/25/2012 - 09:47 | 2288198 Caggge
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100 year gilts or 100 year kilts. After 100 years you turn around and take it up the.....

Sun, 03/25/2012 - 09:49 | 2288200 Rastadamus
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one inch every ten years...... Get one now!

Sun, 03/25/2012 - 10:27 | 2288255 GetZeeGold
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Good news junior......we've setup a trust fund for you. You can cash it in when you're 100.


Sun, 03/25/2012 - 14:27 | 2288712 AldousHuxley
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US is just taking over UK's role as world imperialist providing commerce and trade protections via air & space dominance instead of sea



US has much better weather too.

Sun, 03/25/2012 - 10:58 | 2288287 reload
reload's picture

Yes, and no: QE & ZIRP are destroying savings and preventing capital formation- BUT, take it away and the housing Market freefalls, damaging the banks again. The uber indebted average British household is trying to de lever, but the increasing tax take and inflation make it hard. Disposable incomes have shrunken big-even with record low mortgage rates.

There just are no good outcomes, the productive economy is too hollowed out and government spending .....well it's far far too high.

The UK political class ( like everywhere ) is the tool of banking and corporate interests. The current tax and pretend to save policy will not change. Not until all the wealth of average citizens has been stolen by government policy. Meanwhile we will continue to be told "we're all in this together" yea....right.

Sun, 03/25/2012 - 11:58 | 2288397 GottaBKiddn
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Screw the housing market, it is one of the biggest scams of all. A few of the people have figured out how to charge the rest of us to live here.



Sun, 03/25/2012 - 12:06 | 2288411 WestVillageIdiot
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Watching those two twats was like watching two monkeys fuck a football.  You had the skanky old (what was up with that outfit?) hag arguing for the "you owe us everything because we're old" lobby and the wretched old bat speaking on behalf ot the "you can't let us die or the world will end" bank lobby. 

Never once did they address the right or wrong of the massive pension promises to people like that sheep that they brought out as their "victim du jour".  They did not address the criminality of the banks, or even the pension funds.  The raggedy cougar did not address the fact that these pension funds are invested in such shit (probably as favors to their buddies in The City Mafia) that all of their investments could go to 0 and then the pensioners would really see what their pensions are worth.

That conversation was so naive, so pointless and so stupid that it was a massive disservice to even place that on the Internet without a disclaimer stating, "the following is a comedy program performed by trained monkeys.  Please do not attempt such colossal stupidity at home". 

Sun, 03/25/2012 - 17:41 | 2289091 Banksters
Banksters's picture

And they passed the sacred note from generation to generation only to find upon its maturity, it was worthless. - From Ponzinomics 101


-  Our resident fuckwit, trav, says, 100 year gilts will out perform silver and gold...

Sun, 03/25/2012 - 10:31 | 2288258 Silver Bug
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Who in their right mind would buy these things? The only one I can assume that would, would be central banks.

Sun, 03/25/2012 - 11:54 | 2288387 GottaBKiddn
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100 year gilts. That has to rank right up there with large famous bridges.


Sun, 03/25/2012 - 12:26 | 2288475 fajensen
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Ay - ye of little faith: DONG Energy has already issued bonds that expire in 3005 and 3010.  

ISIN: XS0560190901

ISIN: XS0223249003

Why anyone would want to invest in these makes no sense. How it could make sense, I don't yet know. But there it is.

Sun, 03/25/2012 - 21:27 | 2289581 Vlad Tepid
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"Hey Beavis. He said dong.  Uhuhuhuhuh."

Mon, 03/26/2012 - 03:03 | 2290121 LuKOsro
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The 2 bonds that expire in 3005 and 3010 are actually 2 fixed coupon bonds that expire in 2505 and 2021 and become thereafter a variable coupon bond (euribor + credit risk mark-up) to extend the repayment close to perpetuity. 

Sun, 03/25/2012 - 12:06 | 2288409 Ag1761
Ag1761's picture

Article is out of date, I posted a few weeks ago about this. George is loosing it, all getting absurd I think.

Wait till you hear the ammo?

Sun, 03/25/2012 - 09:47 | 2288199 Rastadamus
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The 100 year itch.....

Sun, 03/25/2012 - 09:54 | 2288205 agent default
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Britain is probably the worst and riskiest of the bunch.  It will take a single downgrade for everyone to start paying close attention to them, and once they come across the City endless rehypothecation and leverage treadmill, there will be a total panic over this one.

Sun, 03/25/2012 - 10:06 | 2288220 Manthong
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"locking in for the future the tangible benefits of the safe haven status"

I forget, does the UK poduce anything the world needs outside of tangible financial schemes?

Sun, 03/25/2012 - 10:19 | 2288242 Rubicon
Rubicon's picture

Yes - Weapons.

Sun, 03/25/2012 - 16:07 | 2288915 bonderøven-farm ass
bonderøven-farm ass's picture

......and 'Spotted Dick'.


Sun, 03/25/2012 - 17:54 | 2289116 smiler03
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"I forget, does the UK poduce anything the world needs outside of tangible financial schemes?"

Cleary not a lot. In a list of countries export's per capita here are a few:

1st Hong Kong

36th United Kingdom

46th United States

13 of the top 20 are in Europe.

Sun, 03/25/2012 - 10:14 | 2288233 Sandmann
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Britain fought two World Wars to preserve its status against trade rivals and has merely delayed its inevitable eclipse

Sun, 03/25/2012 - 09:54 | 2288206 Dr. No
Dr. No's picture

will mean “our great-grandchildren” can benefit from the low rates.

If by "benefit" he means the great grandchildren will be the ones who pay the note after 100 years since we will be dead and gone, then yes, they will benefit.

Sun, 03/25/2012 - 09:56 | 2288207 bank guy in Brussels
bank guy in Brussels's picture

Seems small and short-term compared to the British 'consol' bonds that are perpetual, they only pay interest, with no promised repayment date ... still floating around from the 1800s ...

Or the 1000 year bonds issued by some Canadian railways ...

Sun, 03/25/2012 - 10:09 | 2288227 GeneMarchbanks
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I believe in the future...

Sun, 03/25/2012 - 09:56 | 2288209 Goldenballs
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Now is it £25 Billion into 100 yr guilts or a loaf of bread.Well cannot afford the bread so I,ll have a couple of slices instead.

Sun, 03/25/2012 - 09:58 | 2288212 bugs_
bugs_'s picture

England, your grandchildren will pay none of it.  Perhaps they will have the courage to end your Keynesian party since those of us voting now can't seem to elect any throw on the brakes candidates.

Sun, 03/25/2012 - 10:26 | 2288253 magpie
magpie's picture 

Default was once an English institution.

Sun, 03/25/2012 - 09:59 | 2288213 lolmao500
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Are they fucking serious? And why the hell are they calling their bonds, gilts??

Sun, 03/25/2012 - 11:00 | 2288292 Schmuck Raker
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It's a typo, they meant "Guilts".

Sun, 03/25/2012 - 10:00 | 2288214 Fox-Scully
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Let us not forget that they may be talking about pigs (four-legged).  A gilt is a female pig that has not farrowed, therefore, a 100 year-old pig might be valuable unless they really are talking about PIIGS.

Sun, 03/25/2012 - 11:01 | 2288295 Schmuck Raker
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Every day I learn something new at ZH.

Sun, 03/25/2012 - 10:01 | 2288217 Dermasolarapate...
Dermasolarapaterraphatrima's picture

i prefer the 100 year, zero down, no doc mortgage.

Sun, 03/25/2012 - 10:36 | 2288261 Dr. No
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Actually, that seems more sound since a mortgage is a secured debt.  These gov bonds are promises to pay.....unless they change their mind.

Sun, 03/25/2012 - 12:08 | 2288417 GottaBKiddn
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Mortgages/Bonds, they are actually the same, because in the end the dweller/suckers pay.


Sun, 03/25/2012 - 10:03 | 2288218 smb12321
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Wins the "Absurd Idea of the Century" Award.  With exponential advances in robotics, AI, nano, energy sources, etc  the only prediction for the UK in even 10 years is that it will be further in debt.  Anyone who "invests" in this deserves what they get. 

Sun, 03/25/2012 - 10:06 | 2288222 GeneMarchbanks
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'By NOT being a part of the euro experiment, Britain has kept control of its fate and has been able to print its way out of trouble - so far - while its neighbours to the east have all been lashed to the deck of the same sinking boat, but the day is coming when Britain’s profligacy will become important again.'

Well, sort of, if by 'control of its fate' you mean the ability to commit suicide instead of hanging by jury, then absolutely.

'Of course, if Europe WERE to completely collapse, just think how low yields of government bonds would be...'

As if that depends on 'chance' somehow? Should it be decided that Europe should 'collapse' then you will know by the increase in BBC Euro-smear stories and Farage rants. By then of course all the banking and relevant corporations will have already known way ahead of the masses.


Sun, 03/25/2012 - 10:13 | 2288231 Sandmann
Sandmann's picture

Britain is not a country - it is an offshore tax haven and centre of a web of island tax havens. The physical island is unrelated to the web of offshore financial interests that destabilise global markets

Sun, 03/25/2012 - 10:25 | 2288251 GeneMarchbanks
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Same could be said of the States. The Mirage seems always to lead back to the City which is as you state is disconnected from the island.

Sun, 03/25/2012 - 12:12 | 2288434 GottaBKiddn
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The States are one of the islands.



Sun, 03/25/2012 - 10:06 | 2288223 crouton
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First ever post,  Bitchez!!


Sun, 03/25/2012 - 10:25 | 2288252 RafterManFMJ
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Finally saved enough money for a keyboard? Good for you!

Sun, 03/25/2012 - 10:48 | 2288272 WoodMizer
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Gold Star for you;

try saying something funny, interesting or inflammatory next time.


Sun, 03/25/2012 - 14:07 | 2288596 noob
noob's picture

EATPOOP, potty mouth :)

Sun, 03/25/2012 - 11:09 | 2288300 francis_sawyer
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Wear your red arrows like a badge of honor... I do... (see there ~ I junked myself to get the party started)

Sun, 03/25/2012 - 11:25 | 2288330 slewie the pi-rat
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better issue a TROLL ALERT!  L0L!!!


Sun, 03/25/2012 - 12:16 | 2288228 Sandmann
Sandmann's picture

Robert Schuman (the FrenchForeign Minister) and Jean Monnet


Not so - Schumann was a puppet for Monnet who really did the deed with Arthur Salter    see  the  definitive history


BTW  The European Movement was funded by the CIA and sponsored by

Józef Hieronim Retinger

Sun, 03/25/2012 - 10:21 | 2288240 Hobbleknee
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I'll gladly pay you Tuesday, 2112 for a hamburger today.

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