In A First, Bank of England Sells Bonds with Negative Yields

  • May 21, 2020 BST
  • Team Kalkine
In A First, Bank of England Sells Bonds with Negative Yields

In a first in the History of the United Kingdom, the Bank of England has come out and sold negative-yielding bonds worth £3.8 billion. The move which comes at a time when the country is in desperate needs of funds to support the numerous stimulus packages it has rolled in the recent past also tests the country’s economic resilience in terms of investor confidence who would be willing to stand by the country even in this hour of weakness. In the past hundred years, very few central banks have been able to achieve such a feat and that too at a time when everything looks so gloomy. These bonds, however, will go a long way in bringing down the country’s cost of borrowing which it desperately needs to control now, as it is difficult to estimate how much more money would have to be spent on the stimulus measures to beat the slowdown. The move by the Bank of England would work out to be a massive confidence booster for national and international investors who have been worried about the long term prospects of the British economy after several national and international organisations reported that the country will enter into its deepest recession in 300 years.

Interest rates, however, remain at 0.1 per cent

While the Central bank has issued negative-yielding bonds, it did not change its interest rates, which are currently at 0.1 per cent. The bank had in the past three years decreased its interest rates several times to spur growth and encourage credit off-take in the country which had been battered by the pre-Brexit Jittery. Till the end of 2019, the bank had reduced its interest rate to such a low level that taking it down any further would have put the country in a liquidity trap and would have harmed the economy more than bringing any benefit. That situation had not changed as the country was hit by the pandemic, and there was not much in the hands of the central bank in terms of monetary tools. The bank, however, working in conjunction with the Government rolled out stimulus measures where it would be guaranteeing loans taken by companies who are currently exploring all means to help them tide away the pandemic induced business slowdown. In the past few months, most of the initiatives to support the economic scenario in the country has come from the treasury, and it is highly likely that in the coming days we might see more such novel measures being adopted by both the central bank and the exchequer to raise funding.

Sign of Investor confidence even during a pandemic

The issuing of Negative yielding bonds has a special significance and is undertaken by a country or a central bank for more reasons than just raising funds. Negative yielding bonds mean that the investor who buys these bonds will receive less at maturity than what he has paid to buy these bonds. Now there could be various reasons why an investor would want to invest in such securities, the primary one being the confidence in the economy of the country whose bonds he is buying. If the investor believes that the country’s economy will grow significantly during his holding period of the security, so that the currency of the country will value more than what it is now, vis-a-vis other currencies then he will definitely stand to gain if he invests in those bonds. Thus countries issuing such debt instruments are playing to the psychology of national and international investors to impress upon them the underlying strength of their economies and keep up their optimism. On the other hand, these bonds also help the country to balance out the aggregate interest rates on all its borrowings and help it manage its borrowing costs. In the current instance, the Debt management office in the United Kingdom has issued £3.8 billion worth of government bonds with a three years maturity and with an interest rate of -0.003 per cent.

In the recent past Germany had also issued negative-yielding bonds just months before the United Kingdom and European Union parted ways. The separation which was a major negative development as seen by many investor groups who had threatened to decelerate growth across the economic union. In order to deal with the situation, different countries started to take various measure including the measure of issuing negative-yielding bonds by Germany. By issuing these bonds, Germany wanted to showcase the strength and resilience of its economy and its industrial prowess and impress upon the international community that it will be least affected by the Brexit pullout. The United Kingdom is the second member of the erstwhile European Union which has taken such a measure but has a special significance, as it has been done at the height of the pandemic induced slowdown.

Post pandemic scenario in the United Kingdom

The British government has drawn a massive plan to rebuild the economy coming out of the shadows of the European Union. The government, in its budget presented on 11th March 2020 had chalked out a massive public expenditure drive rebuild the country to make it future-ready. The expenditure drive that is slated to be undertaken in the next few years has the potential to drive the growth rate of the country so high as can only be matched by a select few emerging economies. The country just before the breakout of the pandemic was at a heightened level of preparedness to deal with any eventuality that a post Brexit scenario might throw at it, that preparedness is going to come handy to fight with the current slowdown situation. The most important aspect, however, is the government’s approach to deal with the pandemic. The British Exchequer has gone all out to protect the businesses and jobs in the country, right from paying the salaries of people working for small businesses to the staff of large private corporates. The government has also issued loans to businesses at very coherent terms that would otherwise not be issued in normal times and that too at zero rates of interest for the first year, while there would be no repayment obligation during that period. Apart from the above, the government has also stated time and again that it will do all within its ability to support the economy till it is back on its feet again. Thus an investor who has invested in these negative-yielding bonds has a lot to take home with him, as far as underlying strength of these securities is concerned.

 

 

 


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