UK - As the UK government looks set to follow France's lead and issue 50-year bonds, Investec Asset Management warns the move may be merely a "side-show" for investors.
Chancellor Gordon Brown is expected to announce the UK government will issue 50-year bonds in his 2005 Budget speech tomorrow.
Jeremy Toner, fixed income portfolio manager at Investec, said: “While moves to increase the availability of very long-dated assets are to be welcomed, we expect the 50-year bonds issued by the French government and under consideration by the UK and German governments to be a side-show for most investors, at this point.
“Large institutions wanting to match very long-term liabilities are likely to lock these bonds away, turning them very quickly into a highly illiquid addition to the yield curve.
“More importantly, while governments are showing an astute understanding of timing by issuing very long dated instruments when inflation and interest rates are particularly low, investors face the risk of capital losses unless the bonds are priced with the potential for higher future inflation.”
Toner said yields in the UK would need to be at least 5% to account for expected real GDP growth of between 2% - 3% and inflation of between 2% - 3%. There is also the risk that inflation could turn higher at some point in the next 50 years, he added.
“Previous experience with very long dated bonds has been unhappy for investors – for example, the undated UK war bonds issued prior to WW1 and reissued at 3.5% in 1932 – another period of very low inflation and interest rates – have experienced significant capital losses to date,” Toner said.
“In addition, initial demand for the French 50-year bonds from UK investors has so far been surprisingly strong, despite them having few liability matching needs in euros. This suggests a speculative element to current demand and is another reason for caution.”
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