May 5, 2020 / 12:44 PM / a month ago

Britain borrows 3.25 billion pounds of almost-free money

LONDON (Reuters) - Britain sold 3.25 billion pounds of five-year government bonds at a record-low yield of less than 0.02% on Tuesday - raising the prospect that markets could soon pay Britain’s government to borrow money.

FILE PHOTO: A man wearing a mask outside the Bank of England as the spread of the coronavirus disease (COVID-19) continues, London, Britain, April 10, 2020. REUTERS/Dylan Martinez

Unlike in Japan, Germany and some other parts of Europe, British government bond yields have never traded for a prolonged period with a yield below zero.

But in March the Bank of England cut its main interest rate to a record low 0.1%, and announced a record 200 billion pounds in extra bond purchases that has kept a firm lid on bond yields and government borrowing costs.

Since then Britain has massively stepped up its borrowing plans to fund government efforts to lessen the impact of the coronavirus, but its cost of borrowing has fallen, not risen.

At the first of two bond auctions on Tuesday, investors bid for 2.88 times the 3.25 billion pounds on offer of the 2% 2025 gilt. The average successful bidder will receive an annual return of just 0.017% - an all-time low for a conventional British government bond auction.

If the yield at an auction falls below zero, investors will receive less than they paid for the bond if they hold it through to maturity - and the government repays less than it borrows.

Benchmark five-year government bond prices rallied after the auction and yields touched their lowest since March 9 at 0.082%, down 1 basis point on the day.

A later sale of benchmark eight-year government bonds also drew solid demand. Investors bid for two-and-a-half times the 3 billion pounds on offer of the 1.625% 2028 gilt, which sold at an average yield of 0.112%.

The BoE is due to give an update on its gilt purchase plans and the broader, bleak prospects for Britain’s economy at 0600 GMT on Thursday.

At the current record pace of 13.5 billion pounds a week, the BoE is due to have completed its gilt purchases by mid-July.

Most economists polled by Reuters do not expect it to announce more yet, but those at Bank of America said there was a case for the BoE to slow the pace of purchases but commit to an open-ended amount.

“It could achieve the same result - gilt yields pinned to the floor - with lower purchases,” Bank of America’s Robert Wood and Mark Capleton wrote in a note to clients.

Alternatively, the BoE might just announce an extra 50-75 billion pounds of quantitative easing to cover purchases at the current pace until August, when the outlook may be clearer and the BoE is due to make its next quarterly forecast, they said.

Reporting by David Milliken; editing by Stephen Addison

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