Government’s gilt sale – cheap money?

What does it cost to borrow for 50 years?

In October, the government provided an answer to that question and, perhaps surprisingly, it was not “whatever the Chinese would charge.”

As part of its 2015/16 programme for borrowing £127bn (which includes refinancing maturing debt), the Treasury sold £4.7bn of government bonds (gilts) maturing in 2065. That is as far into the future as the ban on TV advertising of cigarettes in the UK is in the past. Investors willing to lend the government money for half a century will be rewarded with an interest rate of just 2.56%.

In spite of the low rate, the issue was very popular, with bids for nearly five times as much stock as was on offer. The last time the government offered a similar ultra-long bond, in summer 2013, it had to pay 3.65%, a reminder of the extent to which long term interest rates have declined over the last couple of years. Those who bought in 2013 have done handsomely, although the typical holders – pension funds and insurance companies – are unlikely to realise their profits and the bonds will have been bought to match long term liabilities.

Whether the buyers in 2015 will be as fortunate as the 2013 purchasers is hard to say. Could long term rates fall another 1.1% by 2017? Such a scenario would suggest a depressed economy, with low/no growth and possibly the spectre of long term deflation (falling prices). “Turning Japanese”, as such economists might put it.

There are plenty of other investment opportunities which offer better immediate income and the potential for long term growth. So if you missed the chance of lending the government cheap money for five decades, talk to us about some alternatives.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

12th November 2015