WASHINGTON (Reuters) - Britain could start selling 100-year and perpetual bonds, Treasury sources said on Tuesday, as ministers seek to lock in current low market interest rates to reduce the future costs of servicing the government’s debt burden.
The Debt Management Office will launch a consultation alongside next week’s budget to gauge the appetite for super-long bonds of 100 years up to gilts that never come to maturity, after initial discussions with investors proved positive.
The consultation with gilt market makers and funds will report back in three months, making the first tranche of any new bonds possible in the next financial year. Currently, Britain’s longest bond matures after 50 years.
Issuing perpetual bonds, not seen in Britain since the end of the First World War - and before that, the aftermath of the South Sea Bubble in the 18th century - would mean the cost of servicing at least some of Britain’s government debt portfolio would remain low even if future administrations had to pay higher interest on new bonds.
“This is about locking in for the future the tangible benefits of the government’s credibility and the safe-haven status we have today,” a Treasury source said. “The prize is lower debt interest repayments for taxpayers for decades to come.”
Bonds with a maturity of more than 50 years are rare. Mexico and the Massachusetts Institute of Technology are among the few issuers of 100-year bonds.
Recent sales of long-dated UK gilts have met with strong demand, and yields on 50-year gilts hit a record low of around 3 percent in January.
With a perpetual bond, the issuer does not repay the principal sum, but can pay interest on it without a fixed end.
The ability to issue super-long bonds would further diversify Britain’s debt portfolio, which already has a fairly long average maturity of about 10 years - one of the reasons cited for Britain retaining its triple A credit rating.
The March 21 budget is not expected to show a great shift in the economic outlook from November’s autumn statement, when the growth outlook was sharply revised downward.
British Finance minister George Osborne, on a trip to the United States this week with Prime Minister David Cameron, has said the budget will be a fiscally-neutral event.
Officials say the focus for the budget will be to safeguard Britain’s triple-A credit rating, with figures likely to show that even a one percent rise in borrowing costs could cost the government 20 billion pounds over five years in debt repayments - about 1,000 pounds per household.
Osborne is said to be keen to reassure credit ratings agencies that his austerity program is on track and that he is determined to see it through after Moody’s Investors Service placed Britain’s top notch rating on review for a possible downgrade earlier this year.
The government is due to announce the details of its credit easing scheme on Tuesday, which ministers hope will improve the flow of financing to small businesses and boost economic growth.
It is unclear whether all major British banks will take part, potentially leaving RBS and Lloyds - in which the government owns sizeable shareholdings - to take up the slack.
Officials say they expect a full range of financial institutions to be involved and discussions are still ongoing on the terms of the 20-billion-pound ($31.47 billion) scheme. It is also expected to pass European Union state aid rules.
Final decisions for any budget measures are likely to be made before the weekend, once Cameron and Osborne have returned from their trip to the United States.
Reporting by Matt Falloon, Editing by Gary Crosse