Negative Bond Yields Add Pressure to Pound Sterling, Registers Loss of 0.5% against Resurgent Euro

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• GBP/EUR spot rate at time of writing: 1.1152
• Bank transfer rates (indicative guide): 1.0860-1.0940
• FX specialist rates (indicative guide): 1.1000-1.1050 >> more information

The Pound-to-Euro exchange rate was seen to be under pressure on Wednesday courtesy of improving sentiment towards the Eurozone's single currency, while Sterling was broadly softer owing to developments in the UK's sovereign bond market that saw yields fall into negative territory.

For the first time ever, bonds sold by the UK government would average a yield of below zero after the Debt Management Office auctioned £3.75BN of gilts (UK government bonds) for maturity in July 2023, with an average yield of -0.003%.

Investors will receive annual interest of 0.75%, but they paid above face value for the bond so the cash return will be less than they have lent if they hold the debt to maturity.

Considering the now non-existent return on government debt, gilts will appear to be a highly unattractive investment vehicle for foreign investors.

This matters for Sterling as the currency has over decades derived value from the steady demand for UK government debt from international investors; the negative yield now on offer means the currency has lost a significant pillar of support.

Shaun Osborne, Senior FX Strategist at Scotiabank says the Pound's relative underperformance could have "negative rates to blame after the UK today sold bonds at a negative yield for the first time ever".

The Pound-to-Euro exchange rate reversed recent gains and fell back to 1.1150 as markets grappled with the developments in UK debt markets, but the downside pressure is also aided by a more sustained and broad-based bid for the Euro.

The Euro has taken on more of a shine since Monday's news that Germany and France would back a new bailout fund for the European Union, valued at €500BN.

For the first time in its history members of the EU looks set to collateralise risk and issue an EU bond to raise money aimed at helping poorer member states recover from the economic effects of the coronacrisis.

"The German side abandons its resistance against a joint debt sharing. This about-turn might seem questionable on a regulatory front but as far as the evaluation of the FX market is concerned an important player has changed sides to the camp of all those who do not want to leave all the work to the ECB any longer," says Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

Leuchtmann says the developments do not yet represent a game changer for the Euro, but this step by European leaders does nevertheless provide an element of support going forward.