By Roland Jackson (AFP) – Mar 14, 2012
LONDON — Chancellor George Osborne will next week unveil plans for state bonds lasting 100 years, as the government seeks to capitalise on low interest rates, sources said Wednesday.
Osborne will use his annual budget statement to launch a consultation on century-long bonds and could also unveil more perpetual gilts, on which the capital is never repaid but interest is charged forever, a Treasury source told AFP.
"The chancellor is expected to announce this at (the) budget" on March 21, the source told AFP. Currently, the longest British government bond, or gilt, with a fixed-term maturity is 50 years.
But the coalition government wants to take advantage of current ultra-low British bond 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 we have today," the source said.
"The prize is lower debt interest payments for taxpayers for decades to come. It is a chance for our great grandchildren to pay less than they otherwise could have expected to thanks to this government's fiscal credibility."
British gilts are in huge demand as investors are reassured by the Conservative-Liberal Democrat government's efforts to slash its debt and avoid the severe troubles that have rocked the eurozone.
In addition, the Bank of England is buying massive amounts of them with newly-created money that it hopes can in turn be used to stimulate an anaemic economic recovery.
British 10-year gilts were offering yields of 2.3 percent on Wednesday -- below countries with lower budget deficits than Britain.
"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."
Brooks said that demand for British government bonds was being driven by the Bank of England's asset purchase programme, known as quantitative easing, and which is aimed at boosting economic growth in Britain.
"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 noted.
The central bank last week maintained the level of its asset purchasing scheme aimed at boosting lending among commercial banks -- at £325 billion (388 billion euros, $514 billion).
Its nine policy members also voted to hold the Bank of England's key interest rate at 0.50 percent with Britain at risk of fresh recession and three years after it slashed BoE borrowing costs to the current record-low.
Neil MacKinnon, an economist at financial group VTB Capital, said Tuesday that bond demand was also solid because Britain had managed to maintain its gold-plated AAA credit rating.
"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," he told AFP.
Britain's National Association of Pension Funds forecast a low take-up of such bonds among pension funds owing to the time-frames involved.
"Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the government issue more of those," NAPF chief executive Joanne Segars said in a statement.
"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."
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