Government bonds: the 50-year IOU that pays next to nothing

Last week the UK government raised £4bn by selling a bond which is due for repayment in 2073, over 50 years hence. Such was the enthusiasm shown by the buyers that it could have sold ten times as many bonds. The previous week inflation, the force that destroys bond values, reached a five-year high and is widely expected to pass 7 per cent soon. The government is paying just 1.2872 per cent.

As a triumph of hope over experience, these numbers are hard to beat. In the last half century, the UK has never experienced more than a fleeting few months when inflation was below 1.2872 per cent, so the buyers (or their descendants) are almost certainly going to be worse off should they hold on for the next 50 years.

So who on earth would commit to an almost certain loss by buying a bond? The UK Debt Management Office, understandably delighted with the result of the offer, revealed that over nine in every ten buyers were UK domestic institutions – no kindness of strangers needed here, then. Aside from traders taking a view that the price of the stock would quickly rise enough for them to make a turn, the buyers are the usual suspects among life assurance companies and pension funds. They have liabilities stretching to half a century, and their actuaries can’t sleep at night without having some ultra-long assets to match them.

They may be a match in terms of timescale, but barring some UK inflationary miracle, at this price bonds will fall woefully short of matching the actual liability when it arises. This is why the proceeds of that life assurance savings policy, full of your contributions, produces such a disappointing result, or why private sector employers have fled from offering pensions linked to final salaries.

The actuaries will go on about risk and mortality (it’s what they do) until the rest of us are blinded by the science. While they are calling the shots, the UK’s incontinent government can continue to borrow for the far distant future on terms which are effectively financial repression. One day, though, the market worm will turn, those docile buyers of gilts will come out on strike, and the government will have to pay up to the point where it must confront measures to curb its insatiable thirst for money. It has happened before, after all.

Smart, but dumb

The clue was in the name. Smart meters, like smart motorways and smart anything else sponsored by the government, were always going to end in expensive tears, and so it is proving. The cost of installing these devices was £13.5bn at the last estimate, four years late and well over budget. As is rapidly becoming the norm in the energy market, installation is free, with the shocking £420-a-time cost spread over everyone else.

Smart meters were a dumb idea from the start. Even before the rollout started, it was obvious that the internet and smart phones would soon provide an almost cost-free way to send a meter reading, but as is par for the course in such projects, the costs have risen while the benefits have been illusory. Early devices failed to work, or went dumb if you switched supplier (as we were constantly being urged to do) and now the decision to phase out G2 and G3 phone networks means that millions of later versions will need a site visit to upgrade them.

Still, there’s nothing like government for reinforcing failure, and the latest wheeze is to get a meter reading every half hour and transmit it to the supplier. This will, we’re told, allow “surge pricing”, so we can be charged more for turning on the dishwasher, or penalised for boiling the kettle at peak times.

This is such a brilliant idea. Indeed, it is marginally better than the off-peak meters that have been measuring night-time consumption for at least the last 40 years, only costing billions more and being highly intrusive. Do you really want some state authority to know that you were not at home when you said you were?

The good news is that we are proving highly resistant to the official nonsense being peddled about smart meters, and that nobody is obliged to have one. Eventually, perhaps, we shall have a proper smart meter which will turn on the washing machine when the price of juice drops below a level that we can set. Until then, give thanks for good old Economy Seven.

Pulp fiction?

It seems that Standard Life Aberdeen’s brave effort to economise on letters by becoming Abrdn (inexplicably, the board had rejected the suggestion of “Staberdeen”) has run into stock market bureaucracy. The former life assurance company has had to postpone asking shareholders to approve its latest deal because it can’t get enough paper to print the documents.

The problem is far from trivial. Abrdn has half a million shareholders, most of them left over from the demutualisation 16 long years ago, and the 120-page document has to go to all of them, and thenceforth straight to the recycling. Even those gallant few who try to read it will find it incomprehensible, in the manner of such things. They are not there to be read, they are there to comply.

The waste of thousands of tonnes of good-quality paper scarcely bears thinking about. One day, perhaps, the rules will have changed to allow shareholders instead to be told where to look for the document on the web (or how to get a physical version). By then, who knows, the Abrdn share price might have recovered past its float price, those 16 long years ago.

Jonathan Ford and I have launched a Podcast, A Long Time In Finance, published every Friday on Spotify and the Apple app. At 20 minutes, it won’t detain you for a long time in finance.