Britain has sold gilts with a negative yield for the first time in history as borrowers pay for the privilege of lending to the UK Government.
It means the UK has joined the likes of Germany and Japan in selling its government debt at a negative yield as coronavirus sees the world lurch towards a steep recession, with central banks embarking on mammoth bond-buying programmes to offer economic life support.
The Debt Management Office (DMO) confirmed the UK sold £3.8 billion of three-year gilts at a yield of minus 0.003% – the first time ever below zero for a longer term UK government bond.
Investors have been piling into gilts amid the Covid-19 pandemic, with UK government bonds seen as a safe haven due to Britain’s strong creditworthiness, especially in times of economic turmoil.
Bond yields fall as prices rise, but the negative yield means investors who hold them to maturity will get back less than they paid.
Whether the Monetary Policy Committee choose to adopt negative policy rates or not due to low inflation, there will be continued demand for gilts at low and negative yieldsAaron Rock, Aberdeen Standard Investments
It comes as investors have been pricing in the possibility of negative UK interest rates – with bond prices having rallied recently as a number of Bank of England policymakers have said they might consider cutting rates below zero.
Pressure is also mounting on the Bank to consider more radical options, with the latest official figures showing inflation tumbled to 0.8% in April – the lowest level since August 2016 and far below it’s 2% target.
The Bank has already cut rates to 0.1% and added another £200 billion to its quantitative easing (QE) programme.
Despite the negative yield and in a sign of unwavering demand for UK gilts, the DMO revealed there were £8.1 billion of orders in the Wednesday gilt auction – more than twice the amount it was looking to sell.
This comes in spite of the UK’s emergency coronavirus support measures, which will send government borrowing soaring.
Aaron Rock, investment director at Aberdeen Standard Investments, said: “Whether the Monetary Policy Committee (MPC) choose to adopt negative policy rates or not due to low inflation, there will be continued demand for gilts at low and negative yields.
“The MPC will likely increase the size of their QE programme in June, and reserve managers and other investors continue to view the UK as retaining institutional credibility and low credit risk.”