George Osborne is planning to launch a 100-year bond, says
"http://www.ft.com/cms/s/0/8300b436-6d3c-11e1-b6ff-00144feab49a.html?ftcamp=published_links/rss/markets_capital-markets/feed//product">the FT — a sure sign that the Bond Bubble is getting
even bigger. These devices are usually used by American universities: the California Institute of Technology "http://online.wsj.com/article/SB10001424052970203833104577070613830155408.html">issued one at 4.7 per cent, MIT did one "http://blogs.wsj.com/marketbeat/2011/05/11/mit-issues-rare-100-year-bond/">at 5.6 per cent, and a few American companies have tried at 6 per cent. The Mexcians sold a "http://online.wsj.com/article/SB10001424052748703298504575534621044294114.html">billion bucks’ worth of century bonds a while ago at 6.1 per cent, so it would only be a matter of time before
HM Treasury — a world leader in, ahem, novel debt vehicles — was going to do the same.
The US Treasury Borrowing Advisory Committee suggested that the Fed does this last month. It’s not quite as crazy as it sounds: in today’s yield-starved environment you can get away
with anything. Little wonder the American unis chanced their luck: they didn’t really want to issue debt notes that almost no one would live long enough to collect, but they can get away with
it due to market forces (i.e. an Asian savings glut and governments forcing pension funds to buy long-term government debt). Such long-term gilts offer the type of convexity which looks good in the
kind of spreadsheets that hedge fund managers use (the Danish national bank has done a good wee primer, "http://www.nationalbanken.dk/C1256BE9004F6416/side/Danish_Government_borrowing_and_Debt_2005/$file/kap10.htm">here).
So there are lots of technical explanations about how a loan payable in March 2112 is a good idea. But if the last crash taught us anything, it’s that if something sounds too daft to be true
— it probably is.
P.S. Osborne is being quite modest, by historical standards. In 1751, the Treasury issued neverending bonds paying a 3.5 per cent rate called "http://en.wikipedia.org/wiki/Consol_(bond)">Consol. When they make a comeback, you’ll know that the bond bubble really is about to burst.
UPDATE: Osborne will spin this as a sign of confidence in his policies — and he’ll likely succeed. No one will mention the way QE rigs the bond markets. Even Evan Davis, an
IFS graduate, suggested on Today this morning that only Britain could get away with 100-year bonds because we’re so stable and never have revolutions. Can this be said of Mexico, which just raised
$1 billion in century bonds? Or China, which flogged $100 million of century bonds in 1996? Nor can Osborne’s bonds be seen as a reflection of Britain’s ‘safe haven status,’ as The
Times says in its splash today. Is Mexico a safe haven? Is China?
Century bonds are a reflection of the crazy bond bubble, outlined by Allister Heath in a cover story for us
last September. This could burst at any time. When it does, century bonds could well be looked upon the way we now see 125 per cent mortgages: crazy products, for crazy times.