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Things That Make You Go Hmmm... Such As A "Fiscally Credible" UK And Its Upcoming 100 Year Gilts
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.”
Wow!
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...
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100 year gilts or 100 year kilts. After 100 years you turn around and take it up the.....
one inch every ten years...... Get one now!
Quantitative Easing is destroying UK economy and savers
Good news junior......we've setup a trust fund for you. You can cash it in when you're 100.
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.
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.
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.
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".
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...
Who in their right mind would buy these things? The only one I can assume that would, would be central banks.
http://jamesturkblog.blogspot.ca/
100 year gilts. That has to rank right up there with large famous bridges.
Ay - ye of little faith: DONG Energy has already issued bonds that expire in 3005 and 3010.
ISIN: XS0560190901
ISIN: XS0223249003
http://www.dongenergy.com/da/investor/finansiering/pages/udstedte_obliga...
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.
"Hey Beavis. He said dong. Uhuhuhuhuh."
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.
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 latest....got ammo?
The 100 year itch.....
Clarke & Dawe:
http://www.youtube.com/watch?feature=endscreen&NR=1&v=KzrpqkoF3rU
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.
"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?
Yes - Weapons.
......and 'Spotted Dick'.
"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.
http://en.wikipedia.org/wiki/List_of_countries_by_exports_per_capita
Britain fought two World Wars to preserve its status against trade rivals and has merely delayed its inevitable eclipse
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.
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 ...
I believe in the future...
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.
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.
http://en.wikipedia.org/wiki/Compagnia_dei_Bardi
Default was once an English institution.
Are they fucking serious? And why the hell are they calling their bonds, gilts??
http://en.wikipedia.org/wiki/Gilt-edged_securities
It's a typo, they meant "Guilts".
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.
Every day I learn something new at ZH.
i prefer the 100 year, zero down, no doc mortgage.
Actually, that seems more sound since a mortgage is a secured debt. These gov bonds are promises to pay.....unless they change their mind.
Mortgages/Bonds, they are actually the same, because in the end the dweller/suckers pay.
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.
'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.
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
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.
The States are one of the islands.
First ever post, Bitchez!!
Finally saved enough money for a keyboard? Good for you!
Gold Star for you;
try saying something funny, interesting or inflammatory next time.
Bitch
EATPOOP, potty mouth :)
Wear your red arrows like a badge of honor... I do... (see there ~ I junked myself to get the party started)
better issue a TROLL ALERT! L0L!!!
george0sborne
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
http://www.amazon.co.uk/Great-Deception-European-Union-Survive/dp/082647...
BTW The European Movement was funded by the CIA and sponsored by
Józef Hieronim Retinger
I'll gladly pay you Tuesday, 2112 for a hamburger today.
You realize that 99.9 percent of the readers here have no idea what you are talking about... (Popeye and all that 50s stuff)?
Ask the dude with the Wimpy avatar (can't remember his handle right now)
Then they're cultural ignoramuses. I was weaned on Star Wars (the one where Han actually shot first) and I still know that stuff.
But I get your point - hell nobody knows or seems to care that Hunger Games, which we're all being told to like, is a direct rip-off of Battle Royale and Stephen King's stuff.
I wonder if accounting rules will be changed to demand mark-to-market losses on these bonds be carried on the balance sheet when held in the non-trading book (i.e. buy to hold). Surely a paper loss on this absurd maturity has to be accounted for somewhere, especially when liquidity rules demand the market be tested for liquidity and demand even on buy-to-holds.
Also isn't this just a very narrow (and exceptionally flawed) concept. Unless the governments total funding has a maturity of 100yrs, then the shorter and medium term refinancing can easily be punished and drive up the shorter term interest rates. With such a rate and credit sensitive instrument, the 100yr gilt could be the first thing offloaded.
The UK is borrowing at historically low interest rates because of its prudent fiscal policy. Net debt / GDP is only 65%. The fact that its net debt / GDP is 100% is just a result of European Union definitions. And then we need to deduct the purchases of the Bank of England, which are cumulatively about 20% of GDP. So, we have one of the lowest government indebtedness ratios. Yes, the annual deficit is slightly troubling at Stg 120 billion per year, or 8% of GDP, but the Bank of England can easily absorb this amount without a problem, until the usual growth engines of the economy - the consumer and the financial-services sector - return to full strength.
Thanks for the chuckle, islandman.
Most elegant trolling in quite some time. Subtle delivery style, very unassuming.
I gave a +1 to Island for style.
This kind of trolling needs to be encouraged if we're to have any hope the others might improve.
Yes, much more subtle than Hamy or MDB, although it could all be the same program. :~)
The best part is about "ignoring the BoE purchases".
"until the usual growth engines of the economy - the consumer and the financial-services sector - return to full strength"
so............in a hundred years.
I had no idea the mandarins in Whitehall had access to ZeroHedge
"Island man" ?! Jeezus, yet another alias for million dollar bogus
I just hope this guy isn't on my island!
get a grip, you nobhead.
Gideon? Is that you or did you get Danny (desperate to be important) Alexander to type that out with the only finger not up his own arse.. ?
The use of numbers and these things (%) were particularly effective, troll. You must be an economonomonomist.
"Britain has kept control of its fate and has been able to print its way out of trouble - so far "
Hahahahaha... This is like saying by stepping off the tracks of the oncoming local train and onto the tracks of the oncoming Express you have gotten "out of trouble".
They have delayed the inevitable and thus made it worse, just like here in the US and in Japan. The densest hedgetard on this site understands this.
Queeny, Andrew, Charles they're all on the list.
War war war is all they like.
http://www.haaretz.com/news/middle-east/obama-window-for-diplomatic-solu...
Obama: Window for diplomatic solution to nuclear Iran is closingIran has real Persian Gold and Black Gold.
Rest of the world has tungsten filled bars and tar sands.
What other choice do the banksta's have, other to invade and confiscate?
buzz in... buzz out... Like going into Wisconsin, right? /sarc
In and out in six weeks ... the oil revenues will pay for the invasion.
Bet you never heard that before.
The UK is one flash crash, HSBC naked short exposure, scandal, or sneeze from financial crash.
I used to really like the UK...until about the 80s. Fast forward to 2012. The UK now combines the worst of Europe (high taxes, nanny state, uncontrolled immigration) with the worst of the US (high finance overlords in control of everything). Ever use Heathrow terminal 3? The worst airport terminal in history... lines in front of all bathromms because they didn't build enough, cramped seating, all so that they could squeeze as many shops into the area as possible. And do not every think of critisizing anything because they will treat you as a terrorist if you do.
The UK is the heart of the NWO. Nuke it from orbit.
Got good pubs though.
You forgot to mention: A police state running well beyond George Orewells imagination.
This whole system of debt can't go on much longer. US, Japan and UK are buying each others debt to keep the game alive. While the prudent countries are buying Gold instead of debt that can't be repaid without hyper inflation happening to their currency. Then they will repay the debt 50 cents on the dollar, if that.
Buy GOLD!
Prudent countries get a visit from NATO followed by a forceful insertion of Central Banking up their arse! Then their ressources are pledged as collateral to pay for the bombing campaign and "Corzined".
It's going on a year since S&P downgraded the US and put it on review for another downgrade. We passed on the Supercommittee, extended the payroll thing without funding it and have another trillion dollar budget defecit. It's going to be funny watching these agencies try to squirm around the issue of having to downgrade us again soon.
"But if we down grade them again there won't be anybody left to pay our inflated fees!"
Didn't they sack the guy who authorised the downgrade? Problem solved!
Derisory. The money printers at the bank of England make Bernwanker look like a disciple of Ludwig van Mises.
http://en.wikipedia.org/wiki/Pound_sterling
check out the table Buying power of one British Pound compared to 1971 GBP
1971: 1.00 GBP was worth 0.091 GBP in 2010 - a loss of 90% in 30 years.
http://www.fgmr.com/serious-problems-ahead-for-the-british-pound.html
Where can I trade my milt for a gilt?
100 year gilt - well, they all might as well be 100 year notes, or 1000 years. They are not investments, but "secure" - as in full faith and credit - storage devices for wads of printed fiat, with a fluctuating value due to the interest rates bouncing around.
Had to fix this one for ya plat--gave ya a greenie tho.
This whole system of debt can't go on much longer. US, Japan and UK are trading trashfills to keep the game alive
Here is why sov printing ability is a extreme advantage.
Figures from Eurostat
Rail passenger numbers - millions passenger KM
Spain - Years 2004 to Years 2010
20238 21047 21519 21236 23336 22742 22044
notice the peak in 2008 despite continued massive investment in railway length and speed including the Madrid Barcelona high speed link in Feb 2008.
en.wikipedia.org/wiki/Madrid–Barcelona_high-speed_rail_line
Length of railways km - Years 2004 to 2010
12837 12839 13008 13368 13353 13354 13853
Now lets look at a country with much less investment in railways but operating with a sovergin currency - The UK
Rail passenger numbers - millions passenger KM
Years 2004 to 2010.
43474 44642 47297 50474 53002 52765 55831
a slight decline during the Y2009 shock to 52765m but a continual upward trend and indeed a huge increase from Y2004.
Yet there are no high speed lines in the UK………. and line length (km) has decreased from Y2004
16458 15810 15795 15814b 15814 15754 15884
So you are getting effective good / service substitution in the UK because the money supply has not declined as dramatically.
The Euro is not working ……… sensible Spanish capital investments in a +$100 oil world would be running to capacity if they were inside a national currency.
The UK is now using its 19th century investments to get itself out of this self inflicted energy disaster zone.
With it now getting major EIB finance to bring back old lines.
www.rail.co/2011/03/.../borders-railway-gets-european-financial-boo...
www.rail.co/2011/.../eib-to-loan-110m-for-nottingham-tram-extensio...
www.rail.co/.../manchester-metrolink-extension-gets-500m-eib-supp...
"Yet there are no high speed lines in the UK".
Specific definitions by the European Union include 200 km/h (124 mph) for upgraded track and 250 km/h (155 mph) or faster for new track. By that definition there are many hundreds miles of upgraded mainline railways that have regular 125 mph speeds on them.
For new High Speed track there is the 67 mile HS1 which connects London to the Channel Tunnel. It allows speeds of 143-186 mph.
http://en.wikipedia.org/wiki/File:High_Speed_Railroad_Map_Europe_2011.svg
Ok - smarty pants - theres HS 1 - for some reason I forgot about that line - perhaps because its a international line but HS 2 has not been built yet. (when I think of High Speed I think of TGV)
My deeper point is that there has been a dramatic shift in transport patterns withen the UK chiefly because of its sov currency -which provided enough tokens to switch transport types despite a lack of investment.
However the drop in the money supply withen Spain has not provided such a monetory mechanism which does not help to maximise the use of scarce resourses.
It is a good article, I just wish Grant Williams didn't squeeze two narrow columns on a page. It would be so much easier to read if the he allowed only one column to take up the whole page.
Let's see I'll offer bonds that will pay offer a 3% interest rate payable 100 years from now. With half the money I get from the sale of the bonds I'll buy gold and silver which will be more than sufficient to pay off the bond. With the rest I'll buy booze, women, and porn.
It's easy - gov't buys it... uses their own accounting so on balance sheet it keeps value at par. Low volume means price will stay approximately the same.
They now have low interest loan with strong assets. Works right?
Meanwhile, on the continent, 20 years are next to eternity for the EFSF
http://www.efsf.europa.eu/attachments/fi/efsf_eu000a1g0aj7_issue_n_6_190...
not sure if ZH already covered this.
I can guarantee it will eventually be seen as one of the most colossal cases of mis-selling ever seen in the UK
I'd think it would fall more into the category of mis-buying... the sellers will be happy.
Lets go the whole way. We need Millenial Gilts. We also need millenial mortgages with balloon payments in 20 years. Better yet, the thousand year mortgage with no payments necessary until 2150! Or go with the "Pleistocene Bonds" that aren't payable until the end of this geological period.
It's called "QE TO INFINITY"...in case you didn't know.
I'm perplexed Tyler?/ How in the heck can you Brand a 100year note a { GILT/Bond}? The coupon rates, only run through ( 2055).
It's more like an untradeable/ Hedge for the BoE. Am I wrong?
I predict a frenzy of buying as the speculators frontrun the BoE.
Look for the 100 yr yield to approach zero.
It seems no one cares that the obligations of the BoE have been junk for almost 100 years as is, what's another 100 years?
In 100 years, sharia law will have abolished bonds as usury. The grandchildren of the people who issued these will have long since emigrated, converted or been beheaded by a rusty knife.
If the government wants to keep prices stable, it needs to devise a fair way to increase or decrease the money supply.
Or else, just get the hell out of economic targets altogether!
"As I keep saying; none of this matters to anyone until it matters to everyone."
well I keep saying I'm getting younger. Where am I going wrong?