Wednesday 20 May 2020 10:58 am

UK sells bond with negative yield for first time ever

The UK has sold a bond with a negative yield for the first time ever, meaning investors want to hold government debt so much that they will pay to do so.

The three-year bond sold at an average yield of minus 0.003 per cent. The bond has a “coupon” of 0.75 per cent, but because investors paid above face value for the bond their returns will be negative.

Read more: Job retention scheme could cost £84bn, says UK budget watchdog

It comes as the UK government ramps up borrowing massively to fund its unprecedented coronavirus support programmes.

Schemes such as the job retention programme are hugely expensive. The UK’s budget watchdog has said public sector debt could hit 95 per cent of GDP this year as the country runs its highest ever peacetime deficit of around £300bn.

The Treasury said in April that it will try to raise £180bn from investors in the bond markets over the next three months. The £60bn per month extra borrowing is an increase from the already huge £45bn the government raised in April.

It means the government will be selling roughly four times as much debt – i.e. borrowing – over the next three months than originally planned in the March Budget.

Today’s sale of a bond with a negative yield is yet another sign that investors are unfazed that the UK’s debt burden is set to rise dramatically.

However, demand for the bond was relatively low by recent standards. Investors sought to buy just over twice the £3.75bn of debt that was on offer.

Read more: UK to raise £225bn from bond sales to fund coronavirus measures

Bond yields – the effective rate of return when price is factored in – have plunged in recent years as the Bank of England has kept interest rates close to record lows and bought colossal amounts of debt in the secondary market.

This trend has intensified during the coronavirus crisis. The Bank has slashed interest rates to a record low of 0.1 per cent. It has also added £200bn to its “quantitative easing” programme, through which it creates money to buy bonds so as to lower borrowing costs in the economy.

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