UK Sells Negative-Yielding Bonds

UK Sells Negative-Yielding Bonds

over 3 years ago2 mins

How low can UK bond yields go? Pretty low indeed: the government sold $4.6 billion worth of bonds with a negative yield for the first time in history on Wednesday 🇬🇧

What does this mean?

The UK sold one-month bills with a sub-zero yield back in 2016, sure, but Wednesday marked the first time the country had sold longer-term bonds with a negative yield. The bonds – which join the $17 trillion worth with negative yields available worldwide – essentially mean investors are getting back less than they paid after factoring in interest and maturity payments. In other words, they’re paying to lend to the UK government.

Source: The Wall Street Journal
Source: The Wall Street Journal

The sale isn’t particularly surprising. For starters, Britain’s central bank has both cut interest rates to near-zero levels and begun buying billions of dollars worth of government bonds, pushing up their prices and lowering their yields 🏦 Likewise, with data out on Wednesday showing inflation in the UK falling to its lowest level since 2016, bonds are generally becoming more appealing: lower inflation makes their interest and maturity payments worth more over time.

Why should I care?

There are reasons why investors would buy negative-yielding bonds in the first place. For one, they might be anticipating even higher demand for those bonds in the future, which would push prices higher and enable them to sell at a profit. For another, long-term bond yields are normally higher than short-term bond yields 🤔 So if nothing else changes, simply holding a bond – even a negative-yielding one – will likely see its yield fall and its price rise over time, again allowing holders to sell at a profit.

Austria’s vanishing bond yield | Bianco Research & Market Watch
Austria’s vanishing bond yield | Bianco Research & Market Watch

The US government, meanwhile, sold 20-year bonds for the first time since 1986 on Wednesday, adding to the Treasury’s existing $25 trillion debt pile. The government typically sells 10- and 30-year bonds, but it needs extra funds for the massive spending that’s propping up the economy during the pandemic.

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