UK government sells bonds with negative yield for first time ever

UK sold gilts with a negative yield for the first time in history on today, meaning investors paid for the privilege of borrowing from the UK government.

The three-year bond, which matures in 2023 and raised £3.75 billion for the government, was sold by the UK Debt Management Office with a yield of -0.003%.

The bond pays investors 0.75% per year in interest. As they paid over the odds it means they will get back less than they invested over three years.

Negative interest rates, which have been a key feature in Europe, occur when investors are willing to pay for a higher level of certainty they will be paid back. Typically, the lower the yield the safer the investment.

Unsurprisingly demand for the bond was low by recent standards, with investors bidding for just over twice the £3.75 billion on offer.

The last time a bid-to-cover ratio was below 2.15 was on March 19, before the Bank of England announced it would buy an extra £200 billion of assets to support the economy through the coronavirus crisis.

Quilter Cheviot's Richard Carter said the sale was an "historic moment" and would throw the spotlight on Bank of England rate setters.

"It will also fuel the debate over the Bank of England’s interest rate policy and whether they will follow the ECB’s lead by taking official rates negative. Recent comments by MPC members suggest they are keeping their options open and could ‘go negative’ if the economy flat lines during the second half of 2020.

JP Morgan Asset Management's Hugh Gimber said: “When central banks discuss the rationale for their actions, driving down government borrowing costs is rarely a goal that is emphasised.

"But while this may not be made explicit, the impact of the Bank of England’s rate cuts and increased asset purchases is absolutely clear from this morning’s groundbreaking gilt auction"