Posted on 11 December 2017 by
The University of Oxford has just raised £750m in a 100 year bond at 2.54%. Its initial target was to raise just £250m but having received orders for over £2bn it increased the issue to 3 times the original indicated size.*
This is the first Bond issue from a University as a whole, although individual colleges have issued debt in the past. However, equally interesting is the maturity date.
Although the UK Government has issued undated gilts in the past the longest maturity it has issued, at least within living memory, has been 50 years. Fortunately, the term of the biggest coupon it has ever had to concede, 15.5% in the early 1970s, was for only 25 years!
The current longest dated gilt matures in 2068 and at close of play on 7 December its yield was 1.63% and so the spread between the yield on this 50 year gilt and the new University of Oxford 100 year bond is only 91 basis points.
One might expect investors to demand a higher yield on a 100 year bond than one with a 50 year term. However, an analysis of the yield curve on conventional gilts suggests this may not be the case.
Gilt yields peak at 25 – 30 years and then start to decline, as per the following examples:
|Closing yields on 7/12/17; Data from tradeweb.com|
The huge oversubscription of the University of Oxford’s bond suggests that there is significant untapped investor demand for very long term bonds issued by borrowers of sufficiently high quality, which would include the UK Government, despite credit rating agencies over reacting to Brexit by limiting its credit rating to AA.
This suggests the Debt Management Office should be testing the water with a 100 year gilt issue. Based on the 50 year gilt yield of 1.63% and a reverse yield curve of 17 basis points between 30 and 50 years, it might only have to concede a yield of 1.5%, or possibly even less.
The University’s 100 year bond issue also highlights an area of market failure in the fixed rate mortgage market. At a time when interest rates are still very close to all-time lows it should be possible for those mortgage borrowers who wish to do so to lock into a fixed rate for the term of their mortgage. However, the only borrowers who have this option are the over 55s whose LTV is low enough to qualify for a Lifetime Mortgage, where rates start at under 4% and borrowers can effectively create their own interest only mortgage.
The fact that all the strategically important UK banks passed the Bank of England’s recent stress test, which simulated deep recessions in both the UK and abroad and also large falls in asset prices, is another step on the road to recovery for the UK banking system.
Does the Prudential Regulation Authority believe that UK mortgage borrowers who wish to insure their mortgage payment rate for the whole mortgage term, rather than just a few years, should have the ability to do, thus reducing the risk of default when rates rise? Or is it perhaps more worried that if too many people had long term fixed rate mortgages the Monetary Policy Committee’s ability to carry out its primary remit of keeping the Consumer Price Index within 1% of 2% would become much more difficult?
If the former, The Bank of England should encourage any lender with the desire and credit status to do so, to borrow long term money and hence be in a position to offer longer term fixed rate mortgages, rather than imposing additional regulatory capital constraints making it more difficult for lenders to offer such mortgages.
*Reuters; FT: Times,
Correct at date of publication.
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