Britain sold a government bond with a negative yield for the first time, joining Japan, Germany and some other European countries in selling debt yielding less than 0%, reflecting the prospect the coronavirus pandemic will cause a severe global recession and bond-buying by central banks to mitigate its impact.
The auction saw £3.75 billion ($4.6 billion) of gilts maturing in July 2023 at an average yield of -0.003%. “The impact of the Bank of England’s rate cuts and increased asset purchases is absolutely clear from this morning’s groundbreaking gilt auction,” said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.
Yields for two-year benchmark gilts, which are sensitive to BoE rate expectations, sank to a record low of -0.051% last week. Demand for the bond was low by recent standards: investors bid for just over twice the amount offered, the weakest demand since before the BoE cut rates. By contrast, a new 10-year gilt the week before drew a record $100 billion in orders.
The negative yield does not mean all buyers will lose money, as some may be hoping the bond’s price will rise further and they can sell it on, said Marc Ostwald, strategist at ADM Investor Services. Others would be looking to hedge against the risk of the BoE cutting rates below zero, he added.
For British company pension funds, which are limited in how they can invest, negative yields will increase costs and potentially require employers to provide a cash top-up. “This may be the last thing the sponsor needs, given the current economic situation and the potential difficulty in affording those extra payments,” pension fund trustee Vassos Vassou of Dalriada Trustees said.