Over the Top on Deflation

If I should die, think only this of me:
That there's some corner of a foreign field
That is for ever England.

-- Rupert Brooke

In the debt market, there is a corner that is for ever England.

Britain has £1.9 billion (about $2.8 billion today) in bonds from World War I, otherwise known as the Great War, still outstanding. They have no maturities and pay a rate so low that there is little incentive for the British government to redeem them.

At least one investor, however, is putting on his tin helmet and marching down to the trenches. Hugh Hendry, the co-founder of Eclectica Asset Management in London, is buying the 91-year old war bonds, Bloomberg News reports. Hendry's bet is that deflation will eventually grip Britain and make the bonds pay off. The British inflation rate is currently 4.5 percent, while the bonds have a couple of 3.5 percent.

"If you have a deflationary shock, the only instrument that will perform will be government debt," Hendry tells Bloomberg.

The 1917 bonds were first sold with a coupon of 5 percent; during the Depression, the coupon was cut to 3.5 percent where it has since remained.

Britain has other perpetual government bonds, some dating back to the 19th century, according to the British Debt Management Office. Most pay interest twice a year; some four times.

Hendry is unlikely to sell his strategy using the poster that was used to sell the bonds originally. The poster, reading "Put Strength in the Final Blow: Buy War Bonds," portrayed a British solider bayoneting a German combatant through the chest. The image sparked outrage in both countries. Investors in Frankfurt today would not be amused.