NEGATIVE YIELD GOVERNMENT GILTS
What Does it Mean for Investors?
In the past week we have seen a first: The UK government has issued negative rate government Bonds. A previously unheard-of situation.
BUT WHAT DOES IT MEAN?
In answering that question, we need to look at it in a little more detail.
The UK, and just about every other Government the world over, issues Bonds, or GILTS as they are known, to raise capital for both day to day running costs and infrastructure projects. Nothing unusual there. The process is normal via auction as it was in this case.
In this case it was for £3.8bn, or thereabouts, of Gilts that would be exercisable in 3 years. It was this tranche that got bought on a negative yield – the buyers get back less in 3 years than they have invested. They are arguably paying the government to guarantee a future rate of capital being available.
What that means is that a collective of competitive institution’s such as pension funds are willing to purchase the Government Gilts at below inflation to secure the future value of their asset under management. Now this isn’t a first, other countries have done this in the past few years but, never the UK.
SO, WHAT DOES IT MEAN.
Here’s the crux. It could be interpreted as:
1. Major institutions believing a recession is going to follow the easing of lockdown and that growth. will be seen to be negative,
2. That interest rates and other forms of ‘fixed’ income are going to be below zero.
The latter of which as all investors know is already pretty much the case with even ‘generous’ savings accounts offering not much more than .25% per annum
THE CONUNDRUM.
So as one of our clients asked a colleague, in paraphrase:
‘How can I invest, comfortable of getting a fixed return but with the knowledge my investment is as secure as it can be’.
The challenge of combing a reasonable fixed income and some higher level of security makes for a more challenging evaluation.
Negative Interest Rates - A downside for investors?
It essentially requires the ‘investment’ to be secured either by some form of floating charge over a company, that’s not typically practical as many companies have many charges with banks, etc that will always precede some other charge.
Perhaps better is where the investment has a fixed asset that underpins it. This of course could be the case with property, art, prestige cars or other assets such as yachts. Berkeley House case offer this type of product through ‘The Yacht Bond’.
As always entering into any form of ‘investment’ requires due diligence.
It seems this again points to the benefits of utilising the services of a boutique regulated alternative asset managers who specialise in these types of opportunities, effectively providing some degree of increased assurance that investments, whilst not removing all the risk, are managed correctly. Berkeley House Capital is one such boutique Company.
If you are a Wealth Manager, IFA, Family Office or Finance Professional and would like to know more about our investment products and/or services, send us and email to arrange a convenient time to discuss.
If you would like to discuss any aspect of this note please feel free to email: charlotte@berkeleyhousecapital.co.uk and one of the team will be very happy to arrange call with you.
www.berkeleyhousecapital.co.uk
12 Hay Hill, Mayfair,
London. W1J 8NR
United Kingdom
+44 (0) 207 863 7507
1. Berkeley House Capital is an Appointed Representative of Alternative Asset Management Ltd which is authorised and regulated by the Financial Conduct Authority (No. 450404). Not all of our activities are regulated by the FCA, further details are available from us on request.
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