Markets Increasingly Expect Bank of England Rate Cut

(Bloomberg) -- Investors agreed to pay the U.K. government for lending it cash for short periods, a sign they anticipate a Bank of England interest-rate cut and more economic pain.

The Debt Management Office sold six-month bills with an average yield of minus 0.0005% in an auction on Friday. It’s the first time investors bought the short-term debt at a negative rate.

The drop comes after trade talks between the U.K. and the European Union frayed, spurring bets the BOE may cut its main rate by almost 20 basis points by the end of next year. The yield on two-year government bonds fell this week to record negative territory, and the average rate on one and three-month bills are close to slipping below zero for the first time since 2017.

A messy transition adds to a plethora of risks looming over the U.K.’s economy. These include the government’s plan to end a furlough program, which may spur a jump in unemployment figures, and the rising number of coronavirus cases in the country. They dampen optimism over the 6.6% monthly growth in gross domestic product in July.

BOE Governor Andrew Bailey said last month the central bank has plenty of room to add more monetary stimulus to fight the U.K.’s economic slump. Three-month sterling Libor -- the rate banks can borrow from each other -- is below the BOE’s benchmark, a move that often precedes a rate cut. Most funding rates as far out as 12 months are at all-time lows.

What Bloomberg Intelligence Says:

“There’s still room for the markets to price the outcome of BOE having to cut to zero if Covid-19 worsens and no-deal seems more likely by the November meeting. The negative rate debate may intensify next year.”

-- Tanvir Sandhu, Chief Global Derivatives Strategist

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