Who will buy my lovely gilts?

It was one of the wonders of the age. Why, this column has asked repeatedly over the last two years, are pension funds buying long-dated UK government stocks on yields of less than 2 per cent? It is true that the regulations have progressively forced their investment policy into holding fewer of those nasty, unpredictable shares, but as we have seen in the last fortnight, the so-called “risk-free return” on government stocks is an illusion for the convenience of actuaries.

Any pension fund, or indeed, any other investor who had kept the money in cash and short-dated stocks and resisted the pressure to buy then would have given up around 1 per cent a year in income. That sum looks like dirt-cheap insurance today. The fall in the price of long-dated stock this year, and its sickening lurch last week, offers the prospect of buying on a yield of 4.5 per cent or so.

There seems no need to rush. The UK government is hooked on deficit finance, and it’s far from clear who is going to provide it. Pension funds are maturing, with fewer contributors and rising beneficiaries, so are turning into natural sellers of assets, rather than buyers. At the same time, the Bank of England is itching to start unwinding the infamous Quantitative Easing, to unload the £875bn of government debt it has on its balance sheet.

Last week’s market emergency put that off again, as a further £65bn was pledged to save the gilts market from meltdown. Buying in all that stock almost regardless of cost had a magical effect on prices (which is why yields got so low) but the switch from being a price-blind buyer to selling to buyers who know you have such vast amounts to shift is an altogether tougher prospect.

Were the government’s finances in better shape, it could be done gradually, but as everyone knows, they are not. The new administration has assumed that the market will absorb as much as it needs to raise, without giving it much thought, and without the imprimatur of the Office for Budget Responsibility. The chancellor is now seeking it ahead of his next Fiscal Event, but rather to everyone’s surprise, the OBR now holds a veto on British economic policy. No wonder the markets are nervous.

DraX-rated horror story

The idea that imported sawmill sweepings and dead branches of trees would substitute for Britain’s biggest coal-fired power stations was always ridiculous, so it is hard to avoid a grudging respect for the spinners at Drax for getting successive governments to believe it. Now, at last, the game may be up. A devastating report from the BBC’s Panorama this week exposed the sham, by tracking full-tree logs from clear-felled forest in Canada to a chipping plant to be turned into wood pellets.

These are then shipped across the world to be stored in special containers (lest they spontaneously explode) before being burnt in the big power station just off the A1, and which sits on vast coal reserves. As the programme pointed out, the whole scarcely-credible process produces more CO2 per kilowatt hour of electricity than burning the coal beneath the power station.

Even this is only possible with subsidies to make the process profitable, the final figleaf being the classification as “green” which allows Drax to claim to produce 15 per cent of Britain’s renewable energy. Of course, the trees cut down do eventually grow again – say in a few hundred years to replace the lost biodiversity, say environmental campaigners.

Still, never mind. Drax says it is investigating carbon capture and storage, a process whereby the CO2 is somehow removed from the power station’s exhaust gases and injected far underground where it stays even longer than it takes for the forest to regrow. Nobody anywhere has yet demonstrated that this process can be made to work commercially, but you have to admire the chutzpah of the Draxoids.

Gaps in Shapps’ maths

Grant Shapps, the garrulous former Transport Secretary, likes to respond to calls to abandon the wretched HS2 project by saying too late, that train has already left the station (giggle giggle) and would cost more to cancel than to keep building. It’s unlikely that he knows more about the reality there than Tony Berkeley, vice-chairman of the Oakervee Review of the project, who concluded that it was a spectacular waste of tens of billions of pounds.

What was true then is much more so today. As he points out this week, after 15 years of development and a tenfold increase in the estimated cost to £136bn (2021 Integrated Rail Plan), there are still no deliverable designs for Euston or forecasts for future demand. Contrary to Shapps’ claim, even the financial train is stuck in the station. Berkeley’s estimate of the net cost of cancellation now is (just) £8bn. Cheap at twice that, for this ill-starred piece of political vanity.

Has there ever been a Budget accorded a worse reception than last week’s Kami-Kwasi “special fiscal operation”? Jonathan Ford and I ask Howard Davies, former financial regulator, Treasury Mandarin and chronicler of Chancellors about why it got such a huge raspberry, and how this effort rates in the roll-call of past fiscal fails. A Long Time In Finance on Spotify or Apple apps.

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