Friday, 16 March 2012

The century bond

After doing what I consider to be a decent job in managing the economy, Mr Osbourne has to go and put his foot in his mouth. He believes that it would be prudent to test the appetite for extremely long dated bonds with the use of the century bond. For those less versed in economics the bond will pay you a coupon of eg 4% of the value of the bond each year for 100 years, then give you back your initial money in the year 2112. This bond seems to have many similarities to the war bond in that it isn't inflation linked and carries a constant coupon for a long period of time.

I suppose I can vaguely understand why he would like to issue this bond. With a fragile economy, nervous investors and a looming downgrade of uk debt, it is a possibility that investors become spooked and sell their bond holdings. When the current bonds expire, investors may demand a greater coupon to justify their continued investment and so the cost to service uk debt would increase.

By financing part of our debt with these instruments, the govt won't need to worry about the near term as they are fully funded for an extremely long period of time.

On the face of it, This sounds fantastic but we are assuming that investors will buy it and there lies the problem

The investors who buy these bonds know all of the above and are unlikely to buy such a long dated bond when the risks to the economy are so great. In fact a failed auction may become a self fulfilling prophecy.

Furthermore these long dated bonds are much more sensitive to changes in interest rates and economic developments than shorter dated bonds (as changes will affect a longer stream of coupons) so these bonds would actually be more volatile for investors.

Finally ask an analyst to forecast 3 years out in advance. 50% of the time he is right.... How can you possibly model a 100 year bond ?

I believe that war bonds sold as they were something that was beyond an investment . To buy a war bond was to help your country defeat the Nazis, "Lend to Defend Your Right To Be Free" and "War Bonds are Cheaper Than Wooden Crosses" are a lot more catchy than "Buy an Osboune Bond.....cos Labour Fucked It"


  1. Interesting but I think a better question is if pension funds HAVE TO buy these prospective bonds. Interesting implications if so, forcing the everyday tax payer has to take on a huge risk/ burden but in effect maybe helping themselves.

  2. I don't know if the government can force a pension fund to buy something. Maybe I'm missing something but we don't live in China