Government selling debt at record low-interest rate since Brexit Vote
The Treasury’s Debt Management Office (DMO) has sold debt with an interest rate at a record all-time low. This has underlined the immense appetite from investors for British Government bonds following the Brexit vote, igniting calls for the Chancellor to ramp up its infrastructure investment while the advantage lasts.
The debt, which is set to mature in 2036, was sold at a yield of minus 1.72 percent.
The previous record, set on 13 July 2016, was when a 10-year index-linked bond was sold at a yield of minus 1.58 percent.
But what does this mean? Essentially it means buyers are paying the Government for the privilege of lending to it.
The secondary market has also seen yields on UK bonds falling at an exponential rate. The benchmark used by the Government’s borrowing costs – a 10-year conventional Gilt yield – is now trading at a record low of 0.533 percent.
Short-term conventional Gilt yields, which are usually in the positive, have also fallen into the negative for the second time since the Brexit vote.
With a record low, some economists have been encouraging ministers to ramp up infrastructure project spending, in order to take advantage while it lasts.
Unlike conventional Gilts, index-linked Gilts protect their investors from the effects of inflation on their bond income, as coupon payments automatically rise with the retail price inflation index.
Analysts suggest that high price investors willing to pay for this product may have reflected the fact that UK inflation is now expected to be boosted by more than the 10 percent reduction in the trade-weighted value of sterling since the referendum.
The negative yield also implies investors will be essentially returning all the inflation protection back to the government.
Demand for this Gilt is likely to have been due to regulatory pressures on pension funds to appease their long-term liabilities with safe long-term assets.
A boost to the trade price of conventional government Gilts has been seen however following the Bank of England restarting its £375bn asset-buying programme. This programme has been initiated in order to support the economy following the Brexit vote, yet long-dated Gilt investors seem unwilling to part with their assets to the Bank of England.
The reluctance from investors resulted in a £1.17bn reverse auction falling short by £52m. With such a shortfall, economists are calling for the Government to boost the supply of long-term Gilts by borrowing to invest in long-term infrastructure projects. These calls are made on the grounds that the Bank’s monetary stimulus would be made more effective.