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Pension funds are the the most likely investors in such long-term assets but they were among the first to dismiss the idea
Investors have strongly criticised George Osborne’s controversial plan for 100-year gilts, branding them a gimmick and a “lousy investment”.
The chancellor will announce plans in next week’s budget for the government’s Debt Management Office to test the appetite for extending the length of government bonds to 100 years or into perpetuity. Pension funds would be the most likely investors in such long-term assets but they were among the first to dismiss the idea.
Joanne Segars, chief executive of the National Association of Pension Funds, said: “A 100-year bond would be too long for most pension funds, and we don’t think that many would buy them. Even if a 100-year bond were attractive in duration, there would be a question mark over whether it would yield a strong enough return for investors.”
Interest rates are at record low levels because the Bank of England is buying up gilts as part of the quantitative easing programme. Average 10-year gilt yields stand at 2%, the lowest borrowing level since the 19th century.
Ros Altmann, director general of Saga and a pensions expert, said: “The Bank of England has artificially rigged interest rates lower and now the government is thinking of locking people into these artificially low rates for a century or forever.
“It’s a bit of a gimmick. It’s a macho symbol the chancellor might want to issue to say: ‘Look how much confidence the markets have got in us, that they are willing to lend us money for so long, at such low rates.’ “
Pension funds might, however, be forced into buying the 100-year gilts to meet regulatory requirements, owing to a lack of suitable, risk-free alternatives.
Neville Hill, head of European economics at Credit Suisse, said: “The reason people need to buy these assets is because that is what regulations require them to do. That is how the UK has managed down its very large debt ratios in the past. In some sense, the cost of financing the government is falling on the shoulders of pension funds and their pensioners. That’s one of the advantages of being a sovereign: you make the laws.”
A trader calculated that Â£100 invested in a 100-year bond issued in 1912, which paid 3.4% interest, would yield Â£2,931 over a century. That is way below inflation, which would have seen Â£100 balloon to Â£8,870.
Mark Dowding, senior portfolio manager at hedge fund BlueBay Asset Management, said: “If you’d invested in a 100-year gilt 100 years ago, it would have been a lousy investment. You are taking a very big bet that there won’t be any inflation at any point in the next 100 years. You could argue that in issuing this gilt there is a greater incentive for the Treasury to create more inflation and inflate away the value of the debt in real terms.”Other countries have issued 100-year bonds recently. Mexico issued $2bn (Â£1.3bn) of government debt in October 2010, which matures in 2110, and has outperformed the market.
Dowding said: “That has received investor demand so there’s no reason why a UK gilt couldn’t also trade well. The deal would get done. Would I want to buy it? I don’t think I would.”