What I hadn’t realised was that the UK’s debt market is peculiar. In the US, average length of the existing Treasury bonds was, at recent count, 4.7 years and falling. Because this is such a short maturity, it means the debt has to be rolled over far more often, and at every point the government runs the risk of setting in stone any changes in interest rates. In France, the average maturity is 7.1 years, in Italy 6.9 years, in Germany 6.35 and in Japan 5.7 years.
In Britain, the weighted average maturity of government bonds is a whopping 14.2 years. Admittedly, as the IMF points out this is slightly lower in the wake of the crisis, but it is still significantly longer than any other major economy.
The basic point: You have to both finance your current deficit and also roll over the bonds used to finance past ones. If you issue lots of three year bonds then you\’ve got to roll them over every three years. If 30 year ones, then every 30 years. Which means that you\’re less vulnerable to higher interest rates the longer the average maturity: for of course the price you\’re paying in interest is fixed for the life of the bonds.
So we\’re in a much better position than many other countries: and the reason seems to be that we\’ve got lots of private pensions: which are at least partly invested in long term gilts. Excellent. Nice little piece of analysis (and note that it came from a newspaper blog, not a newspaper, it\’s not the sort of thing that would make a column).
However, as is pointed out in (my review copy of) \”This Time Is Different\” there\’s also another side to this. As the markets get more worried about your ability to repay in the longer term (ie, not just whether you\’ll default directly, but whether you\’ll do so via inflation or currency depreciation) then the price of your long term debt will rise substantially: while that of your short term won\’t. Thus the average maturity of your debt will fall the more the markets think you\’re in trouble: and the lower the average maturity the more you are in trouble.
It can be self-reinforcing……