Ooh look, a new home for the cash you’ve received from last week’s redemption of War Loan, finally paid back just two years short of its century. As if to mark the occasion, the UK government sold another slice of a bond with a fixed repayment date, a mere 53 years away. The terms show why it was worth doing. Instead of the 3.5 per cent coupon on War Loan, this slice of the 2068 gilt yields just 2.62 per cent, the lowest-ever return on a long-dated UK bond.

Buyers are desperate for any sort of return. They must pay the Swiss government for the privilege of lending to it for ten years, and negative-yield bonds are the world’s fastest growing asset class. In that context, 2.62 per cent looks better than minus nothing. Yet War Loan remains a cautionary tale about the long-term perils of believing in paper money.

Inflation has eroded its capital value to the point where the purchasing power of £100 in 1917 requires £4000 now. Buying War Loan 53 years ago would have doubled your money in cash terms, but inflation would have destroyed nine-tenths of its value.

The history of the stock since its coupon was cut from 5 per cent to 3.5 per cent in 1932 shows how long these market cycles are. The price fell continuously from 1942 to 1976 (at its low point the stock price of £16.80 matched the 16.8 per cent yield) before a 39-year bull market, culminating in a 2.62 per cent yield on a 53-year gilt.

Now we’ve got here, there are pkenty of explanations:a chronic surplus of savings, quantitative easing from the central banks, technology which allows ever-falling costs of production, the entry of billions of workers from emerging countries into the world’s markets.

These forces may be enough to sustain low rates and negative bond returns for a year or three. They are unlikely to do so for the next half century. The buyers of the UK government’s latest offering must either hope that, against all history, they do, or that there’s a bigger fool who will buy the stock off them on an even lower yield.

Were George Osborne to show some lateral thinking, he could market this stock as irresistably cheap money for long-term projects. Even the wretched HS2 could surely show a better internal rate of return than 2.62 per cent  It might even get finished before the bond was due for repayment.

No social use without profit

“Some financial activities which proliferated over the last 10 years were socially useless, and some parts of the system were swollen beyond their optimal size.” Thus “Red” Adair Turner in 2009, as chairman of the now-defunct Financial Services Authority.

OakNorth, the bank whose board he’s now joined, is neither swollen nor socially useless, at least according to its rather out-of-date website. It’s very small, and wants to lend to very small businesses. SMEs, as the category is called, are everyone’s favourite good cause. They are more dynamic, are the giants of tomorrow, provide fresh employment, etc etc. Nowadays they are also in danger of being killed in the rush to lend them money  This business is harder than it looks. As one senior banker remarked, the last time SMEs were hot: “We’ve got plenty of these customers we’d be happy for others to have.” Socially useful is one thing. Profitably socially useful is quite another.

Business as usual

It’s that time of year again, where readers of the 488 pages of expensively produced report and accounts turn straight to the remuneration report (25 pages). Very little changes. Bankers still believe that normal pay scales are for little people, and that £513,000 is fair reward for a non-exec chairman of HSBC’s US subsidiary.

Across the road in Canary Wharf, Barclays directors signal what they think of their shareholders’ views. Sir John Sunderland is still chairman of the remuneration committee, a year after the bank said he would step down following the previous year’s revolt over higher pay for lower profits. Not before awarding the newish chief  executive a £1.1m bonus, Sir John is finally going next month, after an influential group of shareholders demanded his immediate resignation. Barclays is not thanking them for the reminder.

This is my FT column from Saturday

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