Bond rally sends UK short-term yields below zero

The UK joined the club of nations with negative-yielding debt for the first time on Monday as investors bet on further interest-rate cuts to ease the effects of the coronavirus outbreak.

As the price of oil plunged by a fifth and stock markets in Asia and Europe tumbled, buyers were prepared to pay the highest prices on record for government debt, which is traditionally seen as a safe place to ride out turmoil.

The resulting fall in yields meant that bonds of maturities up to seven years dipped below zero in early London trading. The two-year yield traded as low as minus 0.04 per cent, while the 10-year benchmark yield touched an all-time low of 0.08 per cent.

“Right now, people are willing to pay up for safety,” said Chris Jeffery, a fixed-income strategist at Legal & General Investment Management.

The move means that some investors are prepared in effect to pay the UK government to borrow, ahead of Wednesday’s budget.

Negative yields mean that investors who buy a bond and hold it to maturity are guaranteed to lose money in nominal terms. Before Monday’s moves, UK government bond yields had not traded in negative territory.

Unlike central banks in the eurozone and Japan, the Bank of England has never set interest rates below zero. Outgoing BoE governor Mark Carney said last year that negative interest rates were “not an option” in the UK.

European Central Bank policymakers said similar things, Mr Jeffery highlighted, before its own move below zero. “You can’t be totally confident that it won’t happen,” he said.

The BoE is now under increasing pressure to cut rates in response to the coronavirus threat, after the US Federal Reserve last week announced an emergency half percentage point rate cut.

Traders are betting there is a more than 50 per cent chance of a rate cut to 0.25 per cent, from 0.75 per cent, at the next BoE meeting this month, according to CME data.

That would take rates back to the record low seen in 2016 after the Brexit vote. Negative yields in bond markets suggest some investors think the BoE might have to go further still, perhaps setting aside its aversion to sub-zero rates.