TL;DR: The Bank of England (BoE) gave-in to a first: UK government bonds, gilts, were sold at auction to yield negative interest. The three-year bond sets an unchartered incentive for the country’s central bank authority. Borrowers are essentially rewarding the government for increasing debt.
England Auctions Negative Interest Three-Year Gilts
It could be a sign the more than three centuries old British institution is pivoting toward negative interest rates as a matter of policy, joining the likes of other European nations and Japan in what economists are insisting is an unprecedented experiment. At the very least, borrowers who snapped up gilts at -0.003% during auction are sending an interesting signal: they’re agreeing to be paid back less than what they’re lending.
The pretext is, of course, coronavirus and the containment response to it by governments shutting down entire industrial economies in the process. To pay for it, in hopes of staving off recession or worse, central banks and treasuries have unveiled ever exotic financial instruments and outright direct cash payments in search of a dam patch to hold back what most experts assume is a tidal wave-like reckoning: inflation, out of control debt, years of resulting austerity to cope.
So far, the world’s preeminent central bank, the US Federal Reserve, has resisted the negative interest temptation — no thanks to its present Chief Executive, however. President Trump routinely complains about the advantage other economies might have on a competitive score with such policies, and urged Chair Powell along accordingly thus far to no avail. Nevertheless, the BoE’s largely symbolic sale on May 20, 2020 amounted to £3.75 billion ($4.6 billion) worth of gilts set to mature July of 2023. Experts called the auction’s demand comparatively weak though stronger than anticipated.
The watchword is stimulus. Keeping economies oiled, encouraging the debitor nature of spending in fear of greater savings or cash hoarding is paramount to government fiscal minders. Negative rates, some analysts insist, doesn’t necessarily mean investors won’t make money, as England debt instrument prices could very well rise in three years or the BoE could further drop rates, causing present buying to be viewed as a prudent hedge. Whatever is the empirical case, the history-making auction does underscore how investors are desperate to find a store of value in wild economic times.
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