Gilt yields head below zero

published 28 May 2020

The government last week sold a three-year gilt with a fractionally negative yield of -0.003%, meaning that investors were effectively paying the Treasury to borrow money from them. In a further sign that central banks’ quantitative easing is forcing market prices through the looking glass, the yield on the five-year gilt also went negative for the first time, hitting -0.003% at the end of last week.

Investors who buy and hold these negative-yielding bonds to maturity will make a small loss. Some hope that the global bond rally will enable them to sell them on at a capital gain, but others may simply have concluded that with the growth outlook shaky there are no better options.

Markets have been spooked by poor data, particularly April’s sluggish 0.8% inflation reading, says Paul Dales for Capital Economics. Yet the key factor is interest rates. The Bank of England has said that negative short-term interest rates are under “active review”. UK interest rates currently sit at just 0.1%. In every sense, the outlook has “all gone a bit negative”. Interest rates on much of the continent and in Japan are already below zero. If the UK follows suit then expect pensions annuities to fall and pension scheme deficits to rise, says James Coney in The Sunday Times. If you think the past decade has been a grim one for savers, “you ain’t seen nothing yet”.