Britain looks to new 100-year government bonds

March 14, 2012
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, LONDON, Mar 14 – The British government intends to issue new long-term bonds of 100 years and more, and will announce details in next week’s annual budget, media reports said on Wednesday.

Finance minister George Osborne will use his budget to launch a consultation on super-long bonds and could also unveil perpetual gilts, on which the capital is never repaid but interest is charged forever, according to various reports.

The Times newspaper, which cited a Treasury source, said the government wanted to take advantage of historically low interest rates to borrow money cheaply from institutional investors and pay it back over an extended period.

“This is about locking in for the future the tangible benefits of the safe-haven status that we have today. The prize is low debt interest payments for taxpayers for decades to come,” the paper quoted the source as saying.

“It’s a chance for our great-grandchildren to pay less than they could have otherwise expected to because of this government’s fiscal credibility.”

The Conservative-Liberal Democrat coalition government is currently thrashing out the final details of the budget, which is due on March 21.

British bonds, or gilts as they are known, are currently in huge demand as investors are reassured by the government’s efforts to slash state debt and avoid the severe troubles that have rocked the eurozone.

In addition, the Bank of England is buying them with newly-created money that it hopes can in turn be used to stimulate an anaemic economic recovery.

“The British government is looking at the opportunity of ensuring low rates of interest on UK debt for the long term and also extending the maturity of UK debt,” said Kathleen Brooks, research director at trading site Forex.com

“The longer your debt maturity profile the more stable your debt load is considered to be.

“Since one of the Chancellor’s main jobs is to persuade rating agencies and markets that the UK’s debt load is manageable, this could be considered a shrewd move by Osborne, although it passes the responsibility to pay back the debt to our grandchildren.”

However, she also noted that demand for British bonds was also being driven by the British central bank’s ongoing asset purchase programme, known as quantitative easing, which is aimed at boosting growth.

“The Bank of England is the fastest growing purchaser of gilts and with no sign of the BoE shrinking its balance sheet any time soon, there is a sound logic to Osborne striking while the iron is hot,” Brooks added.

VTB Capital economist Neil MacKinnon added that bond demand was solid because Britain had managed to maintain its gold-plated AAA credit rating.

“The UK government wants to take advantage of the low level of long-term interest rates — this makes sense and will help keep funding bill low,” MacKinnon told AFP.

“There is good institutional demand, given the AAA rating, as the markets perceive a low probability of default and remain confident in the government’s fiscal policy.”

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