As the FT has reported this morning:
Last year, UK pension funds put the highest level of money into domestic government debt since 1963, in an attempt to shield their assets from heightened political uncertainty and market turmoil. According to data from the Office for National Statistics, published on Thursday, UK pension funds put £31bn into gilts in 2016.
The independent producer of official statistics said UK schemes’ shift towards gilts was probably “an attempt to avoid the relative volatility of equity markets”. At the same time, institutional investors including insurers, trusts and pension funds, pulled money from riskier assets such as equities and overseas assets last year. These large investors withdrew £22bn from UK corporate bonds and equities, and £45bn from overseas assets.
The message is abundantly clear. Britain (and the whole world) needs more government debt to meet the demand for stable, secure places to invest. And the UK government is a particularly good provider of that stable, secure investment opportunity. And such is the demand for it that people are willing to, in effect, earn no interest at all (after inflation is allowed for) on those funds just to make sure they’re in safe hands.
Any rational government would meet this demand by issuing more of the debt the markets demand. They would be consciously using the offered chance to borrow at zero per cent real, and actually incredibly low nominal rates, to pour debt into the market and on very long terms. Thirty year, fifty year or even perpetual debt would sell right now. The funds could then be used to build the future those pension funds want for their membership, including homes for their grandchildren.
But instead the government is determined to reduce debt. You literally cannot get more irrational behaviour in the face of market demand than that.