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Updated 00:26 08/08/20

UK bonds hit record negative yields

By Steve Ward, News Editor

24 Jul 2020

UK government bonds or gilts with record low yields have been trading recently, with investors choosing to pay for the government to hold their money in some instances as they increasingly look for safe havens to protect their wealth.

On Wednesday July 15th, investors were bidding on £3.25 billion of the gilts, receiving an average negative yield of -0.069%. The three-year government bonds mature in September 2023 with a nominal yield of 2.25%.

The huge demand from many nervous investors was just over twice the amount on offer. This pushed up their price, beyond their nominal value, and turned the yield to the record negative low.

A day earlier, two-year UK gilts had also reached a negative low of -0.130%. The yield on two-year gilts is generally lower than on three year but rarely returns negative figures.

The yield of a gilt is calculated by dividing the coupon or annual dividend by the bond price. That is the trading price rather than the original nominal value, with premiums above the face value paid during times of high demand. If the price of a gilt rises, as it does during crises, the yield falls. Conversely, during times of economic confidence the price of a gilt falls and the yield rises.

The £3.25 billion of the gilts were issued by the United Kingdom Debt Management Office in an attempt to cover some part of the government's massive spending during the coronavirus pandemic.

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UK Debt Graphic.

The trading followed weaker-than-expected recovery figures for May and increasing numbers of Covid-19 cases globally. Anticipating inflation, many investors are now willing to accept this low level of yield in an attempt to preserve their current wealth. It shows the long-term damage coronavirus is expected to wreak on a now fragile UK economy, given that some would accept a loss.

When accounting for inflation, even before this record UK low, the true yield on bonds and gilts has been negative for some time. Yields on other national government bonds are little or no better; German bunds, Europe's most expensive bonds, have languished in negative territory for some years now. This is, however, only the second time conventional UK government bonds have turned negative – the first being a very short period in 2016.

UK government bonds, gilts or gilt-edged securities, are regarded as an extremely low risk investment. They therefore generally yield a low interest in accordance with the low risk. It is for this reason that they make up a significant portion of many pension fund portfolios. Despite this extreme low risk, a sustained negative yield is unparalleled.

With yields turning negative many investors will instead turn to other safe havens that are offering positive returns. Both gold and silver are one such asset, and both have seen significant price gains in the past 3 months, while offering investors much better returns than currently seen on UK bonds.

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