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Uk Wants To Borrow On 100-Year Low Interest Bonds


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HOLA441

Coming soon: New improved HomeBuy. Put down a 1% deposit and take out a 100 year 99% mortgage backed by the government. Repayments will only be made when your salary goes above the affordability threshold like a student loan.

The 100 year bond idea and inter-generational mortgages would seem to go together nicely.

Where is the consent from the unborn? They are born into debt slavery.

Indeed. There would need to be 1. Some draconian measures to make sure that people don't leave the country after inheriting debt, or 2. A system joined-up enough to catch them if they did.

In the future, trying to find money with any value will be like trying to find the Higgs-Boson particle.

...but to pretend that it's gonna save us billions, or even that making them perpetual, so we never pay back the principle, somehow reduces the debt is utter, utter nonsense !!

Have a look at MSE and how more than a tiny minority of people actually believe that this is true of Interest Only mortgages. Of course, the clue is in the name, isn't it.

Remind me how the UK Governments treat other long term investors, like pension funds, when they're short of a bit of cash...

If you had enough people stupid enough to fall for it, a propaganda machine to promote it, and pension funds bound to buy it, then perhaps anything is possible. The gold-bugs will be in hysterics here.

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HOLA442

70 years later HMG steadfastly refuses to redeme them

Because the interest rates on these loans are far lower than more contemporary loans. Repaying them and then refinancing at current rates would only result in dramatically higher interest payments (even in today's depressed interest rate world).

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HOLA443

Because the interest rates on these loans are far lower than more contemporary loans. Repaying them and then refinancing at current rates would only result in dramatically higher interest payments (even in today's depressed interest rate world).

Which is why these proposed bonds may never be redeemed, or not expected to be redeemed by the markets.

People are supposing that the bonds will promise 0.5% pa, but I expect it will be a higher than that, especially as BOE interest rates are expected to rise and are at a historical low. Not all nations have IRs as low as ours, and these would be traded Internationally.

Anyone who has heard of QE and is aware of the prospect of higher IR would surely anticipate that any rise in asset value would be more than offset by considerable inflation over the next century.

I'd spend the money on something more likely tor rise in price over a century... like a house ;)

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HOLA444

It is in effect an interest only loan, rather than repayment. Just like in the domestic housing market it means you can borrow more at lower cost.

Catch is the capital sum is never repaid unless inflated away, leaving our debts to our children.

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HOLA445

Does anyone here understand the insurance / pensions industry and Solvency II?

With people living longer, do 100 year assets for insurers / the pension industry create any capital relief against longevity risk / term mismatches in assets and liabilities that make 100 year Gilts "cheap" at just about any yield?

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HOLA446
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HOLA447

Brilliant plan, intergenerational mortgages here we come. Looks like the £1bn house is back on.

Why stop at 100 years why not 1000 or 10000.

He isn't. He's thinking of perpetuity as well. ( Better known to us as interest only - as the FSA recently pointed out there are many peope out there who have no strategy for paying off their debt- it appears our chancellor just happens to be one of them)

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HOLA448

He isn't. He's thinking of perpetuity as well. ( Better known to us as interest only - as the FSA recently pointed out there are many peope out there who have no strategy for paying off their debt- it appears our chancellor just happens to be one of them)

It is a kind of time bomb and from an investors perspective not as (dramatically) foolish as you would at first imagine.

If you had a flattish yield curve of around 3% and you issued a 30,50,100 year bond on those flattish curves the issue price of each would be 100 (on a flat yield curve). A perpetual could be priced at approx 95 cents on the dollar.

If the yield curve doubled (remaining flat) to 6% (some would say 'normal') then the price of the 30 drops to just below 60 cents, the 50 and are both just over 50 cents.

If the yield curve flattens and rises to 15% (as seen in 1990) all three would be worth about 20 (including the perp) This is because in all cases the bulk of the value is in the near coupons which are not pved out of existence (as is the case with the later coupons and principal)

The problem is obviously the nearer the maturity the differentials increase again. There is still need for a rollover at some point unless of course you think the rates are low enough for a perp in which case you should issue a perp.

Given GBP may not last as a fiat currency anywhere close to that maturity the can kicking for the goverenment will be irresitable. The invesyors may buy simply to hope they can get off before the ride ends a bit like any bubble.

Gilts and govvies are in a bubble people, this is the end game. Like houses, a lot of people will still buy and make money long after the real value has gone, thats what bubbles do

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HOLA4411

....looking more and more like the interest is the only thing that matters theses days.....create fictional capital to earn an income on the interest paid.....war bonds spring to mind, they have yet to be repaid, might buy a cup of coffee one day if lucky. ;)

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HOLA4412

As much as the principle of this seems disgusting, there's not really much going on here.

The fact that our kids, or kid's kids will be bailing us out is finally admitted. We'd only be rolling over 50 year bonds anyway.

However, some of the total rubbish I've just heard on the radio (5Live) makes me think these financial reporters don't have a clue. I've heard "we'd be locking in today's low interest rates" and "if we make them perpetual gilts, we'd never have to pay back the money, which will save the government billions" !!!!!

Now, who the fck is going to buy a 100 year gilt at 0.5%, or even anything remotely related to today's interest rates???

And who will buy a perpetual gilt for the same rate as a redeemable???

How are people so stupid to think that somehow this will save us?

It seems to me there's some good reasons to have mixture of short and long dated gilts (and by long dated, I mean 25y), but to pretend that it's gonna save us billions, or even that making them perpetual, so we never pay back the principle, somehow reduces the debt is utter, utter nonsense !!

It will be about 4%, which is still pretty low by historical standards.

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HOLA4413

As much as the principle of this seems disgusting, there's not really much going on here.

The fact that our kids, or kid's kids will be bailing us out is finally admitted. We'd only be rolling over 50 year bonds anyway.

However, some of the total rubbish I've just heard on the radio (5Live) makes me think these financial reporters don't have a clue. I've heard "we'd be locking in today's low interest rates" and "if we make them perpetual gilts, we'd never have to pay back the money, which will save the government billions" !!!!!

Now, who the fck is going to buy a 100 year gilt at 0.5%, or even anything remotely related to today's interest rates???

And who will buy a perpetual gilt for the same rate as a redeemable???

How are people so stupid to think that somehow this will save us?

It seems to me there's some good reasons to have mixture of short and long dated gilts (and by long dated, I mean 25y), but to pretend that it's gonna save us billions, or even that making them perpetual, so we never pay back the principle, somehow reduces the debt is utter, utter nonsense !!

It is easy to sell really.

Step 1 : Offer the 100 years for bidding

Step 2 : BoE says it will QE and 100 years is on target list

Step 3 : Hungry investor buys them and hoping to sell it to BoE

Steo 4 : BoE decides not to buy them and investors are stuck with the papers..

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HOLA4414

Does anyone here understand the insurance / pensions industry and Solvency II?

With people living longer, do 100 year assets for insurers / the pension industry create any capital relief against longevity risk / term mismatches in assets and liabilities that make 100 year Gilts "cheap" at just about any yield?

Only the actuaries and the regulators believe in this sort of liability matching.

If a fund buys something that is vastly overpriced (low yield), given long term average, it is to make a lost and (potentially go bust) unless it passes the risk to the annuity holder (in that case, it doesn't even need to match its liabilities as it is varies against the insurer income).

In this case, the pension/indexed link annuity probably goes up by an average rate of say 5% pa and the long dated gilt pays 3.9%, go figure what will happen when these are compounded. (War Loan 3.5%, Price 87, yield 4.0%)

(Not the current management problem., of course)

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HOLA4415

like in Greece...these bonds are effectively default bonds, whereas Greece defaulted on the pension funds directly, ours will be forced to buy these, NEVER seeing them paid back....I mean...who lives till 120 to see a return?

cant see how they will be cheaper than shorter bonds though, but it is a way to steal money from the funds of pensioners and future pensioners, who have put money in these funds so they dont have to simply rely on the state...which these things will Guarantee they will still have to.

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HOLA4416

Only the actuaries and the regulators believe in this sort of liability matching.

If a fund buys something that is vastly overpriced (low yield), given long term average, it is to make a lost and (potentially go bust) unless it passes the risk to the annuity holder (in that case, it doesn't even need to match its liabilities as it is varies against the insurer income).

In this case, the pension/indexed link annuity probably goes up by an average rate of say 5% pa and the long dated gilt pays 3.9%, go figure what will happen when these are compounded. (War Loan 3.5%, Price 87, yield 4.0%)

(Not the current management problem., of course)

Understood.

I was wondering whether there was some sort of perverse incentive / market manipulation going on here.

For example, If rolling out of 30 year Gilts into 100 year Gilts provided capital relief on 5% of the amount rolled, there would be a massive actuarial / regulatory manipulation going on with absolutely no positive (and arguably quite negative) real economic impact.

As you imply, regulatory arbitrage rather than economic reality is an area where insurers (and banks) spend way too much time and effort.

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HOLA4417

So the government, desperate to raise funds come up with this nonsense, when they could so easily tax wealth instead.

As someone posted here some weeks ago, a 1% tax on the UK's national property stock would raise something like £40billion a year, wiping out National Insurance Contributions, or reducing the basic rate of Income Tax to 4%.

Our politicians are too selfish and spineless to pursue the idea of taxing wealth, even so much as in the slightest, the traitors.

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HOLA4418
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HOLA4419

Understood.

I was wondering whether there was some sort of perverse incentive / market manipulation going on here.

For example, If rolling out of 30 year Gilts into 100 year Gilts provided capital relief on 5% of the amount rolled, there would be a massive actuarial / regulatory manipulation going on with absolutely no positive (and arguably quite negative) real economic impact.

As you imply, regulatory arbitrage rather than economic reality is an area where insurers (and banks) spend way too much time and effort.

Capital relieve allows more of only one thing - leverage (which is excellent in a good time and hell in a bad time). Go figure...

Long and short Sovereign bonds carry ZERO charge under Solvency II, so maturity doesn't matter.

When Greek bond were carried with 0 capital charge...we had a firework display a few years later (and more to come...)

ps: Some leisure reading if you have the time:

http://www.actuarialpost.co.uk/article/solvency-ii-sovereign-risk-charges-unlikely-in-near-term-1470.htm

Edited by easy2012
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HOLA4420
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HOLA4422

Just another piece in the "printing money to pay for government expenditure" jigsaw.

We are living the dream. B)

:unsure:

Yes, but the alternative is to face up to reality

And this is obviously far too terrible to contemplate.

Reality is - the last 20-30 years of political consensus has screwed us for generations.

And some people think the answer is Socialsim

:lol::lol::lol::lol::lol::lol:

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HOLA4425

Excellent idea.

Hopefully this will be additional borrowing, not just refinancing, for infrastructure investment.

Merv's engineered the lowest rates in our lifetimes so created the perfect opportunity.

As I've advocated on here for a long time part of this investment needs to go into expanding the housing stock, replacing private rentier landlords with govt. owned stock, thus slashing the housing benefit bill (but given Tory dogma/allegiances I think that highly unlikely!).

Is the BoE going to roll up part of their b/sheet into these perpetuals? Or is Osborne cooking up an even more ambitious plan with Lagarde/Geithner to replace Chinas/surplus country reserves?

Could be a game changer...............

Re this 'childrens/grandchildren's debt' stuff - I don't see today's grown ups muttering about the consols they've been 'burdened' with. Well, with a few notable exceptions :D

Edited by Red Knight
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