Coronavirus: Investors pay UK government to take their money

·3-min read
A view of signage for HM Treasury in Westminster, London.
The UK government raised £3.75bn selling 3-year bonds with a yield of -0.003%, the first time it has issued negative yielding long dated gilts. (PA)

The UK government has issued its first ever negative yielding bond, meaning investors are effectively paying the government to take their money.

The UK’s Debt Management Office said on Wednesday that the government had raised £3.75bn ($4.6bn) selling three year government bonds, known as gilts, with a yield of -0.003%.

It’s the first time that long-term UK government debt has been sold at a negative yield. It means investors who hold the gilt for the length of its contract will receive less money than they put in when it matures in 2023.

The UK is not the first government to sell negative yielding bonds — Germany and Japan have also offered negative yielding debt instruments.

The unusual phenomenon of investors effectively paying states to borrow their money occurs at times of increased financial and market stress.

Developed market government debt is typically seen as a “safe haven” investment. While investors in negative yielding debt will loose a tiny fraction of what they put it, they are almost guaranteed to get the agreed amount back as defaults on sovereign debt are rare.

READ MORE: Coronavirus: Lockdown pushes UK inflation rate to lowest level in four years

The COVID-19 pandemic has sparked a global recession of historic proportions, fuelling the rush to safe investments. A small, near guaranteed loss is seen as preferable to potentially far greater losses in other markets such as stocks and corporate debt.

Wednesday’s bond was marketed with a yield of 0.75% but was oversubscribed more than two times and investors keen to get a piece of the gilt auction bid the price down into negative territory.

The auction bodes well for the Treasury, which is facing an estimated budget shortfall of £300bn this year due to the soaring cost of the coronavirus crisis.

The negative yield on gilts comes as even cash investments in the UK look increasingly risky. Speculation is mounting that the Bank of England could set negative interest rates for the first time in Britain’s history.

Bank of England policymakers such as Ben Broadbent have in recent days made comments suggesting they would consider negative rates. Such a move would mean investors would likely face losses even if they held their money in cash.

READ MORE: Coronavirus: Unions demand Attlee postwar-style shakeup of UK economy

Barclays said on Tuesday the comments from policymakers were “rather unexpected” and “added support to expectations of negative rates in the UK”. Bank of America said it expected the central bank to cut rates from 0.1% to 0% at its next meeting but said policymakers had “removed the floor on policy rates”.

New figures on Wednesday showed inflation fell to a four year low of 0.8% in April, well below the Bank of England’s target of 2%. The fall adds to pressure on Threadneedle Street to take further action to prop up the economy.

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