British yields make one of biggest forays into negative territory in 300-year history

LONDON: British gilt yields made one of their biggest forays into negative territory in their 300-year history on Wednesday after a bond rally sparked by the Bank of England's unexpectedly aggressive stimulus package unveiled last week.

Yields on two non-benchmark short-dated government bonds went into negative territory for a second day running for the first time, and a third dipped into red, having first done so shortly after Britain's decision to leave the European Union.

The central bank cut interest rates for the first time since 2009 and revived its quantitative easing programme last week, prompting benchmark government bond yields across maturities to hit record lows on a daily basis in recent days. But strategists said the scope for further downside was limited given that the BoE has ruled out taking their main lending rates below zero. It is widely expected to cut them in November to 0.1 percent from a record-low 0.25 percent.

"The big difference between the Bank of England and the ECB and BoJ is the Bank of England has clearly signalled that they don't want to have negative rates because of the potentially adverse impact on UK banks," Nick Stamenkovic, strategist at RIA Capital Markets said.

"I don't think we are going to see the extent of negative yields that we have seen in either the euro area or Japan." The yield on the March 2020 gilt dropped to -0.016 percent, matching the previous day's record lows while the September 2019 yield fell as far as -0.012 percent, just short of the previous day's record lows.

The March 2019 yield fell to -0.01, having first dipped into negative territory on July 1 shortly after Britain voted to leave the Euorpean Union in a June 23 referendum and then again on the day of the BoE meeting. On Wednesday it would delay making up a 52 million pound ($68 million) shortfall in a buy back of long dated bonds by three to six months.

The Bank of England failed to get enough offers on Tuesday for a 1.17 billion pound reverse auction of bonds maturing in over 15 years, sparking concerns about the efficacy of its latest attempt to stimulate the economy.

But investors rushed to sell the Bank medium- and long-dated government bonds at its first buy back of those maturities on Wednesday, following on from a high cover on Monday's reverse auction of 3-7 year bonds.

The BoE said it received an offer-to-cover ratio of 4.71 when it bought 1.17 billion pounds of gilts with maturities of 7-15 years, its highest cover since September 2013 and up from the ratio of 2.15 at its last reverse auction for similar gilts.

"The market was very anxious going into it," Peter Schaffrik, chief European strategist at RBC Capital Markets said. "Now that we have a very good cover and all the rest of it, I think the market is calming down to some degree."

The key test however would be the buy back of long-dated bonds next week, he added. Darren Bustin, head of derivatives at Royal London Asset Management, said the Bank may find it easier to buy long-dated debt after the UK Debt Management Office issues 1.25 billion pounds of 40-year gilts next week - but further failed auctions remained a risk.

"If this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution," he said.

Finance minister Philip Hammond has said he will review government tax and spending policy in a budget update later this year. Some economists have urged him to launch a programme of debt-finance investment projects to support the economy.