15th May 2012
One of the features of the credit crunch era has been the rise in price of what are considered to be "safe haven" assets. We have seen this in currency markets for example with the rise of the Swiss Franc and the Japanese Yen which has overrun the efforts of their respective central banks to stop it. More recently we have seen in in the surge in prices in some government bond markets which allow those governments which benefit from this to borrow at what I consider to be extraordinarily low levels.
What are the levels?
If we consider ten-year government bond yields we see that Germany has one of 1.48% this morning and the United States has one of 1.77% whilst the UK can borrow at 1.9%. These are cheap and are close to or at historical lows. Indeed if we combine a currency in demand with a government bond market in demand we see that Switzerland has a ten-year government bond yield of 0.63%.
If we move out to the 30 year maturity we see a similar pattern of extraordinarily low interest-rates. The United States has seen hers fall below 3% and it is now 2.94% and Germany has one of 2.15%. Even the UK has one of 3.2%.
Can we take advantage of this?
Regular readers will be aware of my view which is that the UK should be issuing as many government bonds or Gilts as possible to take advantage of this. In essence we can issue cheaply so let's do as much of it as we can at these rates.
Other's have put a different perspective on this and I have been involved in something of a debate with Jonathan Portes of the National Institute for Economic and Social Research on this subject on Twitter. He has made a suggestion as follows.
Jonathan Portes' Proposal
"What does this mean in practice? It means that if the government were, as I suggest, to fund a £30 billion (2% of GDP) investment programme, and fund it by borrowing through issuing long-term index-linked gilts, the cost to taxpayers – the interest on those gilts – would be something like £150 million a year. To put this in perspective, it's roughly the revenue the OBR estimates will be raised by the "loophole-closing VAT measures" in the last Budget. In other words, we could fund a massive job-creating infrastructure programme with the pasty tax."
Let me start with where we agree
The UK government can borrow cheaply and at quite a few maturities can borrow as cheaply as it has ever been able to.
And where we disagree
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