United Kingdom government sells first bond with negative yield

A British pound note is seen in front of a stock graph in this

A British pound note is seen in front of a stock graph in this November 7, 2016 picture illustration.

Earlier today the BoE auctioned £3.75bn of gilts maturing in July 2023 with an average yield of -0.003% - this marks the first time the United Kingdom has borrowed at a negative rate.

A £3.75bn auction of government bonds included a gilt that matures in July 2023 sold at an average yield of -0.003%, the Debt Management Office said.

While investors will receive an annual interest payment of 0.75%, they paid above face value for the bond so the actual return in cash terms is less than they have lent.

Andrew Bailey, the Bank's Governor, has so far rejected negative interest rates as a policy though pressure is mounting as several colleagues including chief economist Andy Haldane have raised the idea.

It comes as investors have been pricing in the possibility of negative United Kingdom 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. Financial markets increasingly expect the base rate to go negative.

Negative interest rates potentially challenge some banks' and building societies' solvency as they find it hard or impossible to apply them to customers' savings accounts. Yields for two-year gilts dropped to a record low of -0.051% last week.

It means the United Kingdom 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.

Wednesday's gilt sale was 2.15 times covered by demand in the auction - the weakest demand since the BoE cut rates to current levels.



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