It has been commonplace for a while now, in countries like Germany and Switzerland, but today the UK was able to join the enviable ranks of those countries which are effectively able to charge investors for the right to lend to them.
An auction of UK government IOUs – gilts – saw the Debt Management Office, the Treasury agency that handles the government’s cash and debt management, sell £3.8bn worth of three-year bonds with a yield of -0.003%.
That means anyone buying the bonds at issue and holding them until maturity will lose money.
It also means that anyone buying these gilts is effectively paying the UK government for the right to lend to it.
Demand was strong for the issue with investors applying to buy more than twice as much debt as was being auctioned.
The DMO has previously sold very short-dated paper – such as one or three month bills – with a negative yield but this is the first time that a longer-dated gilt has been sold with a negative yield.
The development has huge implications for how government policy could be conducted in coming years.
The government is facing a major expansion of borrowing this year due to the extraordinary measures put in place to protect jobs and businesses following the COVID-19 lockdown.
A Treasury document leaked to the Daily Telegraph two weeks ago suggested the government might seek to fund this borrowing through a combination of tax increases and a squeeze on public spending.
The government was quick to downplay the report, stressing Treasury officials had merely been setting out options for ministers, while indicating that borrowing was more likely to pick up the slack.
And that argument will have been given greater weight by today’s events.
After a decade of disciplined government spending, there is little public or political appetite for more austerity, something the chancellor had indicated even before the COVID-19 pandemic.
Tax increases are also seen as a non-starter since they are regarded as stifling growth.
Indeed, rather than raise taxes, many Conservative MPs would prefer to see tax cuts as a way of stimulating growth as the UK emerges from lockdown.
So the first ever auction of a gilt with a negative yield raises the enticing prospect for ministers of being able to borrow vast sums at relatively little cost.
It is an option that was not available to the coalition government, after the financial crisis, which was forced to push through both tax increases and spending cuts in the face of threatened downgrades to the UK’s creditworthiness from the ratings agencies.
There will also be implications for the Bank of England.
It has cut Bank Rate, its main policy rate, to a record low of 0.1% in response to the crisis but has until now resisted negative interest rates in the way that some of the Bank’s peers – such as the European Central Bank, the Bank of Japan and the Swiss National Bank – have.
However, Bank governor Andrew Bailey today indicated that it would be “foolish” to rule out such a move.
That comes after Andy Haldane, the BoE’s chief economist, suggested recently that taking interest rates below zero remained a possibility.
Accordingly, the fact that at a three-year gilt has been sold to investors with a negative yield seems certain to reignite speculation that negative interest rates are on their way, particularly as two-year gilts tend to move closely with market expectations for Bank Rate.
As Richard Carter, head of fixed interest research at the wealth manager Quilter Cheviot put it: “Today’s sale of a three-year government bond at negative interest rates was an historic moment and demonstrated the ongoing demand for UK gilts despite increased issuance.
“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.”
Aaron Rock, investment director at the fund manager Aberdeen Standard Investments, added: “The decline into negative gilt yields has been aided by the current Bank of England Quantitative Easing buyback programme, and the ongoing debate within the Monetary Policy Committee over the potential for negative policy rates in the UK.
“Whether the MPC choose to adopt negative policy rates or not, due to low inflation, there will be continued demand for gilts at low and negative yields.
“The MPC will likely increase the size of their QE program in June, and reserve managers and other investors continue to view the UK as retaining institutional credibility and low credit risk.”
Meanwhile, although the sale of a gilt with a negative yield will undoubtedly capture headlines, two other gilt auctions during the last couple of weeks will have prompted most sighs of relief in the Treasury.
The vast amount of government borrowing in response to the COVID-19 crisis means that vast gilt issuance is also on the cards.
Some £180bn of debt is expected to be sold between May and July this year.
So the DMO will have taken comfort from the fact that demand was exceptionally strong for a new 10-year gilt auctioned on Tuesday last week.
The DMO sold £12bn worth of the debt but received orders for £82.6bn worth – a record for a gilt of that maturity.
This was followed on Tuesday this week with an auction of a new 40-year gilt.
The DMO raised £7bn from the sale but attracted orders worth £53.1bn.
The two sales show there is no shortage of investors willing to lend to the UK government for long periods of time at relatively negligible rates of interest.
It speaks volumes for how investors regard the creditworthiness of the UK but will come as a relief to ministers, too, as they contemplate the vast amounts of government borrowing to come.
Others will take a different view.
Gilt yields are the basis on which pension fund deficits are calculated – the lower the gilt yield, the higher the deficit.
According to the Pension Protection Fund, the pensions lifeboat, every 0.1 percentage point fall in long-dated gilt yields pushes up pension fund liabilities in the UK to the tune of around £34bn.
So negative gilt yields will have the impact of widening pension deficits – a prospect to guarantee sleepless nights for finance directors of British companies with sizeable retirement schemes.