The UK sells negative-yield bonds for the first time — days after the Bank of England dismisses below-zero rates

• The UK offered negative-yield bonds for the first time ever on Wednesday, ushering in a new market precedent as the debate around below-zero UK interest rates intensifies.
• Negatively yielding bonds essentially leave investors paying to lend to the government.
• Bank of England Governor Andrew Bailey has ruled out negative rates, but other policymakers have suggested an openness to the policy.
• The dueling remarks create tension around a key bond-market driver.
• Any change in Bailey's stance could boost the bonds' value. When interest rates fall, prices rise and market yields tumble.
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The UK sold negatively yielding bonds for the first time ever, setting a new market precedent as the debate around below-zero interest rates escalates.

The UK Debt Management Office sold 3.75 billion pounds ($4.6 billion) worth of three-year gilts at a yield of -0.003% on Wednesday. The office saw demand for up to 8.1 billion pounds ($9.9 billion) for the sale, detailing the market's continued interest in safe-haven assets. The offering effectively leaves investors paying to lend to the UK government.

The sale comes less than a week after Bank of England Governor Andrew Bailey ruled out a negative main interest rate, saying "it is not something that we are currently planning for or contemplating." Yet recent statements from other policymakers suggest negative rates aren't out of the question, setting up conflict around a key bond-market driver.

When interest rates fall, bond prices rise and their yields tumble. Those holding negative-yield bonds stand to win big if the central bank suggests an openness to below-zero rates.

Read more: John Fedro quit his job and got involved in real estate with barely any money. He breaks down his low-cost approach to mobile-home investing, which allows him to live comfortably on passive income.

The central bank chief is scheduled to speak at 2:30 p.m. in London, and investors will be closely watching for any updates to the negative-rate debate. While the bonds' values could receive a healthy boost from the remarks, a reiteration of Bailey's week-ago stance could likely tank the newly offered gilts.

Investors are also pricing in a move to negative rates. Interest-rate swaps currently imply below-zero interest rates before the end of the year, according to Bloomberg.

Wednesday's sale follows new data revealing the coronavirus' economic toll. UK consumer price inflation plunged to 0.8% in April, according to data released Wednesday, well below the central bank's 2% target. The gloomy data release could fuel new calls for additional policy to pad against a recession.

Bailey isn't the only central bank chief strongly opposing negative rate policy. Federal Reserve Chairman Jerome Powell said in a May 13 videoconference that the US central bank isn't considering such actions. Both the Bank of England and the Fed have instead relied on lending programs and asset purchases for economic relief.

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