A year ago, the UK government could borrow for 20 years at 1.8 per cent. Two questions: why did it not raise as much as the market would bear at that price? And why did so many banks, pension funds and financial institutions buy the stock?

Any student of Britain’s economy would have concluded that far from being a “risk-free” investment, buying long-dated UK government bonds at yields below 2 per cent is an invitation to lose your capital. Those of us who pointed this out were widely ignored, mostly because we had been saying the same thing since yields fell below 2.5 per cent in 2016.

Investors who had agreed with our analysis and sold then would have missed the final, glorious phase of the weirdest bull market ever seen, as long gilt prices rose with falling yields. By the summer of 2020, these stocks returned little more than half a per cent, helped down by the excesses of quantitative easing (the answer to the first question above) and the pension fund mantra of “matching liabilities” – the strange belief that if you match the assets to the time when the liabilities are due, then the price you pay hardly matters.

We know better now. In the UK, the need to juice up those pitiful returns produced the bankers’ bonanza of liability-driven investment, while in the US it has taken dramatic bank failures to force the message home. Buy a long-dated bond at a silly price, and you will be caught out when interest rates rise. A really big bank can afford to take the hit, especially since it is suddenly making big profits on the spread between market rates and deposit rates.

A smaller one like SVB cannot disguise losses this way. It had to ask for more capital, quickly, which precipitated a run. As all the world knows, there is no way back from a serious bank run. SVB was essentially a bank run waiting to happen.

Bond Vigilantes at M&G highlighted how it had shifted assets into long-dated bonds when all rates were very low, so any significant rise, with the converse of falling prices, would guarantee the wipeout of the bank. The argument that the disease is not contagious is convincing only if there are not too many more institutions which bought long-dated bonds on the ridiculous yields of yesteryear. That would turn a liquidity crisis into a solvency crisis, which is much worse.

The slump in bank shares everywhere since SVB’s failure indicates that they have “safe” bonds in their portfolios which are worth a lot less than they paid for them. The spotlight will also turn to the pension funds, those natural holders of long-term assets, but whose exposure to UK equities has shrivelled to less than 5 per cent of the value of the market.

This flight follows the disastrous legislation in the wake of Robert Maxwell’s looting of his company’s pension fund. Today’s rules effectively say that a company is liable for any shortfall, but the employees get any surplus. The result is massive “risk aversion,” with shares being deemed too volatile. As Jupiter’s Richard Buxton points out: “For long-term savings vehicles such as pension funds and life assurance products, short term volatility is completely irrelevant when your investment horizon is thirty years or more.”

Today, even after the dash for safety following SVB’s failure, bond yields are miles away from where they were a year ago and buyers are then sitting on massive losses. The 20-year gilt yields 3.85 per cent – it does not exactly look like a bargain to those of us who have spent A Long Time In Finance, but it’s much better than 1.8 per cent, let alone 0.5 per cent.

John Lewis and (no) partners

It seems like only yesterday that the John Lewis Partnership (as it called itself) was held up as the future of retailing: no greedy shareholders to support and a happy workforce prospering from their stake in the business. In the good times, this was very good, but now JLP is finding the downside of this attractive business model.

No shareholders mean no access to the capital markets – even the staff who are not being fired are hardly in a position to contribute, having been told there is no bonus – other than various forms of debt. There is only so far this can help, and with £350m due for repayment in the next three years, that is already stretched to the limit.

It’s hard to see what John Spedan Lewis would have done had his creation been in this hole when he was in charge, but it shows how relentless retailing is. Reinventing the model from here looks impossible. Appointing a specialist from the cost-cutting world of private equity suggests the board agrees.

With Jonathan Ford, Neil Collins posts a free weekly podcast, A Long Time In Finance. Listen on Spotify or Apple apps.