Time like an ever-rolling stream

Bears all its bonds away

Yep, even the 100-year UK government bond which has been floated as a slice of light entertainment this week would eventually be redeemed, even if all the original holders would (hopefully) have been years earlier. Even if a thousand ages in thy sight are like an evening gone, this bond is a silly idea. The current value of £100 discounted for 100 years at 3.4% (the current yield on the longest-dated gilts) is £3.60. So if a 100-year bond were designed simply to expire valueless like an annuity, it would still be worth £96.40 today.

Perhaps “worth” is not quite le mot juste here. Lending to the UK government at 3.4% fixed for 48 years, the longest dated bond on offer, is a triumph of hope over experience. Although long-dated stocks have been on lower yields, you need to go back over half a century to find them, and the buyers then were essentially wiped out over the following decades. Coming right up to date, there are signs that the love affair with the best (or least-worst) quality government bonds is cooling. US treasuries are at their cheapest for five months, while War Loan, having come within touching distance of parity for the first time since 1952 late last year, has fallen by an eighth since then.

It’s not really fair to call it a love affair, since nobody goes to a safe haven for love. It’s more like a shotgun marriage. The Bank of England has now bought almost a quarter of all the gilts in issue, and was not much concerned about the price. At the same time, company pension trustees are being bullied by their actuaries to buy more bonds – again, not because they think them cheap, but because they are supposedly less risky than those pesky equities.

This latter driver is particularly baleful; rather than invest to sustain the business so it’s still around to meet the pension promises, companies are forced to divert profits into tackling the deficits the actuaries find in the funds. The more companies are forced to buy bonds, the more they drive up the prices. By the insane logic of the actuary, the funds then need to buy still more because the yields (and thus the discount rate for future liabilities) fall. Smiths Group this week reported that its deficit had doubled to £450 million, or about two years’ pre-tax profits at the current rate. It’s starting to look like a pension fund with an engineering business on the side.

The net result is that capital is diverted from building the business (or even, horrors, given to the shareholders in dividends for them to use productively) into gilts, and hence into the insatiable maw of the state. Yet even the combined forces of QE, forced buying by pension funds and funk money seeking a safe haven does not seem to be sustaining the long bull market in bonds on both sides of the Atlantic. The clever boys at Bond Vigilantes see parallels between today’s market and that at the start of 1994, a year which saw 10-year US Treasury yields rise from 2.2% to 4.5%. They also note that on 21 July 1993, the Walt Disney Company issued a 100-year bond, and almost rang the bell for the top of the market. So only another 81 years and four months to wait before Mickey gives you your money back, then.

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