UK sells negative-yielding government bonds for first time ever

UK sells negative-yielding mid-term Treasury bonds for the first time after inflation dampened prospects for the Bank of England to cut official interest rates below zero.

At an auction on Wednesday, the country’s Debt Management Office (DMO) said it had sold £ 3.8bn ($ 4.66bn) three-year government bonds at a yield of 0.003%..

Buying bonds with negative yields means that the British government will actually be paid extra for borrowing. Investors will receive slightly less than they originally paid if they hold bonds until maturity, these are the requirements for keeping money in bonds.

Thus, the UK joined Germany, Japan and several other European countries, which convinced investors to accept negative returns..

In 2016, the UK sold a 1-month Treasury bill with negative yields, but this was the first time that longer-term bonds were sold at below zero yields..

The yields on high quality government bonds are sensitive to the City of London expectations of future interest rates, and the drop in annual inflation from 1.5% to 0.8% has sparked speculation that the Bank of England could further reduce the official cost of borrowing, even below historic lows. in 0.1%.

Governor of the Bank of England Andrew Bailey made it clear that negative rates that affect the profits of commercial banks are unlikely to be the Bank’s first remedy if it feels the need to provide additional stimulus to the economy.

Since then, several members of the BOE’s Monetary Policy Committee have hinted that further monetary easing may be needed to cushion the economic impact of the coronavirus pandemic..

«When central banks debate the rationale for their actions, lowering the cost of government borrowing is rarely a goal that is emphasized.», – said Hugh Gimber, Global Markets Strategist at JPMorgan Asset Management.

Great Britain sells government bonds with negative yield for the first time

«While not explicitly stated, the relationship between the Bank of England rate cut and the increase in asset purchases is clear thanks to today’s revolutionary auction.».

DMO holds frequent auctions to sell government bonds to pay for additional government borrowing due to continued economic stall.

Despite fears that the government would have to offer higher yields to investors to convince them to fund the highest borrowing in peacetime, demand for Treasury bonds was high..

Bids for July 2023 Treasury bonds maturing in July 2023 are estimated to be £ 8.1bn ($ 9.9bn), more than double the £ 3.75bn ($ 4.6bn) offer, according to DMO..

Kit Juckes, Macro-strategist Société Général, said it would be a bad idea for the Bank of England to bring rates below zero. «I personally cannot imagine any other economy where negative rates would be a worse idea than the UK.»

Great Britain sells government bonds with negative yield for the first time

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