In general the market value of debt and its par value (the value to be paid at redemption) broadly track each other.

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1 Managing the UK National Debt I The Data Along with Martin Ellison of Oxford University I have for the last couple of years been working on creating a historical database of UK government debt. A number of authors have made extensive use of the fact that for the UK we have more than 3 years of public finance data. Our contribution has been to create a database for the market value of UK government debt built up bond by bond and based on the individual price of each bond. Further details (and a lot of details) are available in the actual paper on which this blog is based but here we outline a few key features of our data. Later blogs will use this data to consider how the government has achieved sustainable debt over 3 years and what is the best policy for debt management given historical experience. Introduction The starting date for government debt is widely seen as 1694 when King William III used a syndicate of merchants to sell debt to finance the Nine Years War. This syndicate went on to become the Bank of England and data is available from this start date to now on the level of UK government debt. Combining this data on the quantity outstanding of each specific bond with their respective price enables us to construct a market value series for debt. This is important as at the heart of academic work on debt dynamics is the intertemporal budget constraint which links the market value of government debt to the expected net present value of future primary surpluses. Previous studies have instead tended to use the outstanding value of debt i.e. the par value. Fluctuations in the Market Value of Debt In general the market value of debt and its par value (the value to be paid at redemption) broadly track each other Market value in data Par value in data However fluctuations in bond prices clearly add additional dynamics. In the late 17s/early 18s the UK was constantly engaged in wars leading to high levels of debt but also a widening discrepancy between par and market value as markets worried about the possibility of defeat and default. At the conclusion of each successful war the market value increased as default risk declined.

2 In 216 the market value of debt was more than 35% higher than the par value of debt. The last time this occurred was around 3 years ago. The very low interest rates in the wake of the financial crisis have produce a bull market for bonds and a large increase in the market value of government debt. Whilst low interest rates may make government bonds look a cheap source of financing the cost to the government of issuing debt is the one period holding return of investors. This is made up of two components coupon payments and the appreciation in the value of government bonds. Since the 29 financial crisis rising bond prices have added around 1.1% of GDP a year to coupon costs of 2.2% of GDP a year. This has pushed the market value of government debt substantially above its face value. The Structure of UK Government Debt The number of distinct bonds outstanding at any time peaked in the early 198s and has started to decline again recently. In the 17s and 18s relatively few bonds were issued and the government preferred undated debt e.g. debt which had no maturity date but paid regular prespecified coupon payments. In the twentieth century the number of distinct bonds issued started to increase substantially. This increase in the number of bonds began with the First World War which led to both a large increase in debt and in the number of bonds as the government starting to issue fixed maturity bonds. With the issuance of indexed bonds in the early 198s the number of distinct outstanding bonds reached their peak. The recent financial crisis again saw both the level of debt and the number of distinct outstanding bonds increase but with the recent retirement of the Consols issued in the 17 th and 18 th century the number of bonds has once more begun to fall (a) Number of gilts outstanding

3 Whilst the number of bonds issued has tended to rise in the twentieth century the average size of issuance has declined significantly. Before the twentieth century debt management was characterised by large issuance of a limited number of undated government securities. During the twentieth century the trend has been to issue a greater number of distinct bonds but in smaller quantities..2 (c) Average size of each outstanding gilt relative to GDP Twentieth century debt management has been about issuing bonds across the whole maturity spectrum As the Figure below shows the First World War led to the issuance of fixed maturity bonds for the first time but these were still mainly long maturities. Since the Second World War the UK government has issued increasing amounts of short debt (less than 7 years). However since 199 there has been a shift in share from 8 15 year bonds towards bonds of maturity more than 15.

4 Over the last 3 years the average maturity of debt has declined almost continuously Average maturity in 216 is 14.7 years As described above originally the government issued undated debt and it was only in the twentieth century the government issued fixed maturity bonds. Not surprisingly this has lead to a decrease in average maturity (the existence of consols/undated bonds makes calculating average maturity complicated. In the calculations above we attach to consols their ex post maturity e.g. if they were issued in 1715 and redeemed in 215 their maturity is 3 years). Whilst the average maturity of UK government debt has tended to decline continuously since 1694 a close inspection of the Figure below shows that since 199 there has been a slight increase in maturity as the government shifts towards more 15 year plus bonds. By the end of the sample the average maturity of outstanding bonds was 14.7 years. Modern debt management has produced a filling out of the maturity structure. The Figure above shows an unusual way of representing the structure of UK government debt. For any one year, say 195, it shows the maturity structure of debt. It does so by putting a black square in the 195 column for 1 if there is a bond outstanding with 1 years to run to maturity and similarly for all bonds outstanding. For expositional purposes we plot consols at 76 years. Two features are very prominent. The first is that over time we see for each year more and more squares. In other words the bond market now is characterised by bonds outstanding at nearly all maturities compared to the historical record. The second feature is the number of diagonal lines running from top left to bottom right. What this signifies is that governments when they issue bonds do not buy them back before maturity but leave them to run until redemption.

5 From 189 onwards the average yield curve slopes up. In other words, short bonds usually provide a cheaper form of finance than long bonds. Long bonds are also more volatile. Although we have data on government debt going back to 1694 the fact that most debt was undated means we cannot estimate a yield curve until more recent times. The Figure above shows estimates of the (zero coupon) nominal yield curve and the volatility of debt by maturity for the period 189 to 216. On average the yield curve slopes upwards short term debt offers a lower return than long term debt. Long bonds also offer more volatile returns than short bonds. The above is a small sample of facts about UK government debt over the last three hundred years. For a summary of what this data implies about how the UK government has achieved fiscal sustainability over this time see Managing the UK National Debt II Debt Dynamics. If you are interested in the dataset or a copy of the paper Managing the UK National Debt by Martin Ellison and Andrew Scott then please martin.ellison@economics.ox.ac.uk or ascott@london.edu. June 217