Now there’s a headline I never thought I’d write. I’m old enough to remember the moment when the yield on 3.5% War Loan equalled its price (a mathemetician writes: that’s the point when you can buy the stock for about £18.70 per £100 nominal, giving you a yield of 18.7% on your investment). Thirty-five years later, the price is (gulp) over £96. Those brave buyers back in 1976 have had £655 in dividends on each £100 invested, and the capital is worth £510. Even adjusted for inflation, that’s a result.

The point of recounting this ancient history is to show how things can change out of all recognition in little more than a single generation. Today’s stampede into “safe” bonds is as rational as the stampede out of them was when inflation looked like an untameable beast during the 1970s.. On anything other than a very short view, UK government stocks are 2012’s bad buy. Marc Ostwald of Monument Securities points to an unintended consequence of UKQE – it’s bankrupting the pension funds. Lend to the UK government for 10 years, and your reward is a yield of under 2%. Lend for 20 years, and the return is still less than 3%. At today’s rate of inflation (4.8%), £100 would buy the equivalent of £22 when the capital is repaid in 2031.

Investors can buy inflation-proofing, but, boy, it’s expensive. The real return on the 12-year linker is minus 0.46%. Unlike the conventional stocks, this one guarantees that your capital will buy you less in 2024 than it does today. No wonder companies, struggling to provide for generations of future retirees, are being eaten by their pension funds. The maths which demands this over-funding is insane. If companies pay to cover the actuarial deficit in their funds, they can find themselves with too little left over to invest in the business on which their future pensioners depend.

Which brings us back to War Loan. In 1919 it accounted for most of Britain’s £7.5 billion national debt. It also carried a 5% coupon, which in 1932 was considered too great a burden for the recession-wracked economy to bear. As the Bond Vigilantes remind us, the remedy was to cut the coupon to 3.5%. To encourage a “voluntary” participation, the Chancellor offered a 1% tax-free bonus to the volunteers if they accepted before the deadline. Since they were going to be given the haircut anyway, 92% of the three million holders accepted. There were no CDSs in those days, but doubtless the Bank would have argued that the UK government was not defaulting on its debt.

The twist here is that War Loan is not, as is popularly supposed, irredeemable, but can be repaid at par, on three months’ notice, in “1952 or after”. Well, we’re here. The national debt has ballooned, and War Loan is now more of a historical curiosity than a major component of investment portfolios. Notice of intention to redeem at par would draw a line under this issue after a century, and leave a useful memorial to QE, an episode which will surely be come to be seen as bizarre and curious as the history of War Loan itself.

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