U.K. Joins Negative-Yield Club After Bonds Caught Titanic Rally

(Bloomberg) --

U.K. government bonds rallied to become the latest to join the global negative-yield club as an oil-price war added to concerns about the impact of the coronavirus.

Gilts surged from the open, taking yields on two- and five-year notes below 0%, the first U.K. benchmark securities to do so. Those levels raise the prospect that the U.K. government could soon be effectively paid to borrow money to finance its spending proposals.

The rally mirrored record-breaking moves in other haven markets such as U.S. Treasuries and German bonds, after oil prices slumped in response to a breakdown in OPEC+ talks.

“I’ve certainly never forecast it, but then I never foresaw circumstances like these,” said John Wraith, a U.K. rates strategist at UBS Group AG. “Now I don’t disagree with -- and wouldn’t recommend resisting -- the breakneck decline and current level of shorter yields.”

It’s a further sign of increasing strain as global economic growth looks set to stall, with money markets now expecting at least one full interest-rate cut by the Bank of England this month. Yields across Europe and the U.S. have fallen to record lows as investors try and protect their portfolios and bet on further stimulus by policy makers.

Negative-yielding debt -- bonds worth less, not more, if held to maturity -- has spread to destroy potential returns for investors. Nearly $15 trillion of investment grade debt, or more than a quarter of the global total, is sub-zero, including all of Germany’s government bonds.

“Investors are prioritizing return of capital, over return on capital,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “There is a negative yield on much of the safe assets, so I think a negative yield on two-year Treasuries and two-year gilts is reasonable, in this environment.”

Two-year yields dropped as much as 15 basis points to -0.04%, while those on five-year notes briefly touched -0.01%. Yields on some non-benchmark securities in the U.K. have fallen below 0% before, in the aftermath of 2016’s Brexit referendum. Ten-year yields were hovering around 0.1%.

In a bond-buyback operation Monday, the BOE became a purchaser of negative-yielding debt for the first time.

Free Borrowing

The moves come just before U.K. Chancellor Rishi Sunak is set to announce the country’s budget Wednesday. There are hints the country’s fiscal rules could be ditched as he prepares a massive package to combat the fallout from the virus. Traders are also speculating the BOE could act by cutting interest rates before its scheduled meeting announcement on March 26.

For HSBC Holdings Plc, even the U.K.’s 10-year yields may not be immune to the pull of negative yields, seeing them possibly dropping as low as Japan’s, which are currently around -0.16%.

“This would be consistent with the market assigning an even greater probability that the bank rate is cut to a new record low of 10 basis points,” wrote HSBC strategists including Daniela Russell in a note to clients, referring to the prospect of BOE action.

To contact the reporter on this story: John Ainger in Brussels at jainger@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, William Shaw, Neil Chatterjee

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