Today, the UK government has sold a bond (government gilt) with a negative yield.
What does this mean? It means that the government is being paid to look after investors money, whilst the investors have agreed to get back a little less than they have lent to the government!
Japan, Germany and some other European countries are also selling negative yielding debt.
Today’s UK Government debt sale resulted in £3.75 billions of gilts, being sold at an average yield of -0.003% and a maturity date of July 2023. Yields for the two-year benchmark gilts (which are particularly sensitive to the mood of the Bank of England’s ‘hawks and doves’) fell to a record low of -0.051% last week.
The Bank of England cut interest rates to a record low of 0.1% in March and began buying 200 billion pounds of assets, largely gilts, to help the economy and the blunt the spike in yields seen during the financial panic at the start of the coronavirus. Some analysts see a possibility that the Bank of England will cut it’s main interest rate to below zero during the latter part of 2020. However, others are more doubtful as they see a consequential risk in the solvency of some banks and building societies, who would find it very challenging to apply the necessary ‘charges’ to retail customers credit balances.
Every cloud has a silver lining: Strong demand for UK national debt is a relief for the government which is likely to incur record levels of borrowing to support the economy during and long after the coronavirus crises
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