Short-dated UK government bond yields hit new lows today as unprecedented interventions from the Bank of England combined with economic uncertainty to boost the gilt market.
The yield – which moves inversely to price – on the 2-year bond or gilt dropped to minus 0.122 per cent in morning trading before rebounding slightly. The yield on the 5-year gilt dropped to minus 0.09 per cent before rising.
A negative yield on a bond means that investors who buy the government debt in the secondary market can expect to lose money if they hold it until it matures.
Negative yields have been driven by central banks slashing interest rates and creating money to hoover up bonds in a bid to boost economies during a decade of uncertainty.
They mean the UK government can borrow at record-low rates as it spends record amounts on fighting coronavirus.
The drop in yields this morning to record lows – also seen in the US 5-year Treasury – came as investors sold stocks in reaction to new coronavirus cases in the US and Hong Kong.
The fall in bond yields was also driven by “rising speculation that the Bank of England will cut rates into negative territory in September,” said Michael Hewson, chief market analyst at trading platform CMC Markets.
An interest rate cut makes bonds look more attractive, pushing their prices up and so their yields down.
“While many are warning of the perils of going down this route there is a growing belief that the Bank of England could well do so in September.”
The US reported a record number of new coronavirus cases again yesterday, with more than 60,000. This has spooked investors, who fear it could derail the global economic recovery.
However, stock markets pared their losses in morning trading. The UK’s FTSE 100 was last up 0.4 per cent although US markets were set to open lower.