Ultra-long Gilts divide opinion

Different views have been put forward on the idea of ultra-long government bonds with a term of 100 years.

In support of the concept, JLT Pension Capital Strategies director, Antony Barker, said that criticisms of the proposals have been overdone. “There are good investor-specific, strategic and overall market-enhancing reasons to welcome a new bond that brings some certainty in an uncertain world. We think it will make derisking and decommissioning more affordable going forward too.”

But against this, BlackRock Multi-Asset Client Solutions group managing director, John Dewey, said: “We think it unlikely that either perpetual bonds, or those with a maturity of more than 50 years, will come to the market. Few investors want an ultra-long bond and fewer still want a never-ending bond. The market has responded with a collective groan to the idea. If the government wants to exploit cheap funding at current yields, it would be better off focusing on existing conventional and inflation-linked bonds with maturities up to 50 years which are particularly attractive to pension schemes.”

It has been suggested the 100-year Gilts would yield as low as 2% a year initially, perhaps more if the UK loses its AAA rating. JLT said that whatever the initial yield is, the bond will find its fair value in the secondary market, where many Gilts are trading at negative real yields already, driven by excess demand. Barker concluded: “If the government expects the birthing class of 2012 to be financially responsible, it needs to lead by example and this is a good start.”