The yield on five-year government bonds crashed below zero for the first time ever today, as investors panicked about a stock market crash, coronavirus and a possible global recession.
City economists think the Bank of England is certain to cut rates at the next monetary policy committee meeting at the end of the month.
Some say it could make an emergency cut this week in line with a budget on Wednesday now regarded as in crisis mode.
Yields on two and five-year UK bonds fell below 0%, which means big institutions are so nervous about the future they are paying to lend money to the government.
Even US Treasury bond yields fell, the 30-year bond dropping below 1%, a development many regarded as extraordinary. All German government bonds pay a negative yield. A 10-year UK government bond pays 0.13%.
Simon French at Panmure Gordon said: “An interest rate cut from the Bank of England, as part of a larger support package, now looks an inevitable reaction to Covid-19.
“The question is really whether the Bank will wait till March 26. It will be tempting for the Bank to move sooner in a co-ordinated display of economic support with the Treasury around this week’s Budget.”
Shares crashed. The FTSE 100 fell more than 500 points initially, about £150 billion worth. It was later down 390 points to 6072.
Ayush Ansal, chief investment officer at Crimson Black Capital, said: “The FTSE’s collapse on Monday morning shows the markets have passed from panic mode into pure hysteria.
“Any positive news around the coronavirus is being ignored outright, while negative developments are being catastrophised. Markets will always be irrational but Monday morning saw the end of reason.”
Russ Mould at AJ Bell said: “Such is the markets’ state of terror they are now expecting, even pleading, with the Bank of England to cut the headline base rate from 0.75% and do so hard and fast.
“Indeed, investors have become so accustomed to central banks doing ‘whatever it takes’ it would be a nasty shock if they did not step up to the plate, with rates cuts, more quantitative easing or even helicopter money to keep the economic and stock-market shows on the road.”
City traders say that computer-driven programmes, so-called algorithmic programmes, make market falls more dramatic since they tend to follow trends. More than 80% of trading in the US is done by algorithms.
Mould said: “Computer-driven programmes had been set up to sell the FTSE 100 and provide downside protection to institutional investors but in the end, they made matters worse.”