It was a good headline for the Treasury’s press release: “Chancellor Osborne to repay part of our First World War debt.” The reality, however, was slightly different.
What the Treasury was doing was refinancing about £220m of 4% Consols, a government stock first issued in 1927. The name Consols gives a clue to the stock’s purpose: to consolidate older government debts, some of which had roots back to 1720 and the South Sea Bubble. For the government of the 1920s, Consols meant borrowing at an annual interest cost of 4% for at least 30 years. After 1957, the Treasury had the right to repay at three months’ notice. In practice 4% Consols were regarded as ‘irredeemable’ as there was no incentive to repay the debt while long term interest rates were above 4%.
The relentless fall in interest rates has changed that assumption: the government can now borrow for more than 40 years at a cost of less than 3%. The investment markets had anticipated that 4% Consols were in line for redemption and so their price was close to their £100 redemption value when the announcement was made. The next irredeemable in line for possible redemption is 3½% War Loan, of which there is nearly £2bn outstanding.
It is fortunate that the government can borrow so cheaply at present, given that total government debt is now over £1.4trn (£1,400,000,000,000). The corollary is that if you are searching for income, the government bond market is not the most attractive place to start. There are plenty of higher yielding alternatives including – perhaps surprisingly – UK shares.