In Brief

Britain sells first ever bonds with minus rates - but what does that mean?

Historic sale comes as Bank of England mulls interest rates cut into negative territory

The UK government has broken new economic ground by borrowing £3.8bn for three years at a price that means investors will get back less than they paid out.

Or as The Times puts it, “for the first time in history, investors have lent the UK government money for a lengthy period with the promise that they will not be paid back in full”.

The issuing of government bonds, or gilts, with an effective negative interest rate of minus 0.003% on Wednesday came as Bank of England governor Andrew Bailey told MPs that plans to slash the base rate - currently at 0.1% - into negative territory were “under active review”.  

So what does it all mean?

A “negative yield” effectively means that investors “have to pay to lend money to fund the government’s response to the Covid-19 pandemic”, says The Guardian.

Gilts are seen as a “safe haven in times of financial stress”, with expectations that “inflation will be close to zero or could turn negative” currently adding to their appeal.

Investopedia explains that during periods of extremely low interest rates, “large institutional investors” are often “willing to pay a little over face value for high-quality bonds”.

These investors accept “a negative return on their investment for the safety and liquidity that high-quality government and corporate bonds offer”, says the financial information site.

The practice has already been deployed in Japan and Germany, with Britain now joining the “topsy-turvy world of negative rates on new government borrowing”, adds The Times.

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What happens next?

Aaron Rock, investment director at Aberdeen Standard Investments, predicts that regardless of whether the BoE’s Monetary Policy Committee chooses to adopt negative policy rates due to low inflation, “there will be continued demand for gilts at low and negative yields”.

BoE boss Bailey last month ruled out cutting policy rates to below zero. But the ongoing crisis has “persuaded the Bank that it needs to consider all tools available to make credit cheaper for embattled businesses and households”, according to The Guardian.

“The move would be unprecedented in the Bank’s 325-year history and would leave only the US Federal Reserve among major central banks to rule out negative rates,” the newspaper adds.

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