Treasury study to reveal investor appetite for Holyrood-issue bonds

By DOMINIC JEFF
Published on 16/09/2012 00:00

INVESTORS have indicated an appetite for buying Scottish bonds if they were issued by Holyrood to support the ­government’s borrowing ­requirements.

“Sub-sovereign” bonds are well established in the US, Canada and some European countries but have not been used in the UK.

The UK Treasury has just completed a 12-week consultation with the financial sector to test investor enthusiasm for an issue of Scottish bonds to help raise up to £2.2 billion in borrowing that will be allowed under increased powers for Holyrood from 2015. The potential drawback is that Scottish taxpayers would pay more to finance debt than their counterparts south of the Border if the Scottish Government has to offer a premium over UK gilts to entice investors.

Yannick Naud, portfolio manager of Glendevon King Asset Management, said that in theory Scotland would have to pay a greater yield than the UK Government, even if the risk to investors were equal, to make up for the fact that the investment would be less liquid.

However, he said that might not matter if the bonds were marketed at Scottish savers rather than large institutions. This would likely be the case as the level of debt sold on a yearly basis would probably be too small to warrant marketing internationally.

“We are not talking about a very big amount, and domestic demand for savings far exceeds that,” he said. “If you assume everything was placed within the retail market in Scotland, then a small difference in yield doesn’t make a lot of difference.

“Even if the Scottish Government paid a 1 per cent premium [over gilts] it would go straight into the Scottish economy and the impact would be minimal.”

He said the bonds could 
either be sold directly to individuals as an alternative to savings accounts, or via asset managers who could then package deals tailored to Scottish clients. Naud said Scots might choose the products because of national pride and because they regarded the bonds as trustworthy.

If retail demand was high enough, yields on Scottish bonds could fall below those on UK gilts – some Canadian states are rated as a safer bet than the central government.

Under the terms of the Scotland Act 2012, which will link Holyrood’s expenditure more closely to taxation raised north of the Border, borrowing powers could eventually be raised above £2.2bn but never lowered. Powers are not scheduled to be transferred until after the likely date of a referendum on independence in 2014. How­ever, any further uncertainty beyond that time would affect the bonds because it makes them a potential currency play, Naud said.

Such uncertainty can occasionally help – long-dated Finnish bonds are currently in demand on the expectation that they will be repaid in a stronger new currency if Finland ditches the euro.

The Treasury has not yet set a date for publishing its ­findings.