Tag Archives | bond yields

UK Bond Yields Explained

UK bond yields are the rate of interest received by those holding Government bonds.

Governments sell bonds (via the Debt Management Office DMO) to fund their budget deficits. Bonds are a way for the government to borrow – a bit like the government taking out a loan.

Government bonds are frequently traded on bond markets. Therefore, their market price may be quite different to the original price set by the government.

Example. A government may sell a 10 year, £1,000 bond at 5% interest. This means every year year the government will pay £50 to the holder of this bond.

  • If demand for government bonds rose, this £1,000 bond would increase in price as investors pushed up the market price.
  • But, the government still pay £50 a year interest until maturity. If the market price of the bond rises to say £2,000, the interest rate (yield) is now 2.5% (50/2000)
  • Therefore higher demand for bonds leads to lower bond yields.
  • Conversely if people sell bonds, this pushes up the bond yield (e.g. what happened in Greece)

Recent UK Bond Yields

uk-bond-yields-10-year-monthly-average

Source: Bank of England – 10 year bond yields

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Why Can Japanese Government borrow at Low Interest Rates?

Readers Question: After the insightful post on ‘Italian Economic Decline’, I was particularly captured by the % debt to GDP line graph of the different developed countries. The one thing that really caught my eye was Japan’s huge % debt to GDP and yet their government bond yields are consistently declining. Aren’t the markets worried that Japan may default on their debt someday or is the fact that they have a lender of last resort (no fear of liquidity problems) unlike Italy and their 0% interest rates shielding them from augmenting yields?

Source: Hoshi and Ito (2012).

It is true that Japanese public sector debt is over 229% of GDP, yet bond yields in Japan remain low. It seems the markets have no current concerns over Japanese repayment. Spain might feel aggrieved that they face rapidly rising bond yields – even though their public sector debt (70% of GDP in 2011) is considerably lower.

  • Japan debt 229.1% of GDP on a gross basis, and 127.8% of GDP on a net basis

Why Can Japan Government Debt be So High at Low Interest rates?

  1. High levels of savings in Japan. Japan’s saving ratio has fallen in recent years (partly due to ageing population) but although it may sound a paradox, there are still high levels of domestic saving. Upto now, this large pool of savings have been used to buy Japanese government debt. (Japan Saving ratio) Continue Reading →

The Economic Cost of High Bond Yields

Readers Question I’ve recently been looking up on the Eurozone financial crisis for random reasons and i don’t understand the statement in an FT article about what we must acknowledge in order to overcome the Eurozone problems. The statement goes ‘no country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors’. Please can you help?!

Firstly, it is not an easy article – there is a lot of jargon! To quote:

“A fundamental shift of tack is required, towards an approach focused on avoiding systemic risk, restarting growth and restoring arithmetic credibility rather than simply staving off disaster”

To answer your question:

A primary budget surplus is the government budget balance excluding the cost of interest payments on government debt.

  • Suppose the UK budget deficit is 11% of GDP.
  • But, interest payments on the government debt cost around £40bn or 3% of GDP.
  • Therefore, the primary budget deficit of the UK is 8%.
  • Suppose Italy’s budget deficit is 2% of GDP, but interest payments are 7% of GDP. In this case Italy actually has a large primary surplus of 5% (even though an actual budget deficit of 2% of GDP)
primary-budget-deficits

Source: OECD Economic Outlook June 2012

This graph showing changes in primary balances shows how countries in the Eurozone have pursued fiscal tightening (spending cuts and tax increases) to reduce their budget deficits. Excluding interest payments, many now have a primary budget surplus.

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