Monday, July 2, 2007
Flashback: Interest Rates up means reduced bond yields
Yields on UK government bonds are at extraordinary lows. This has caught pension funds up in a vicious circle - and could have serious consequences for the UK economy. Is there a problem with gilts? Yes. Yields on some UK government bonds are extraordinarily low. The yield on 10-year index-linked gilts is now just under 1.25%, while that of 50-year gilts recently hit just 0.38%, well below the UK long-term average of about 3%. It is also well under the yield on similar US government bonds, which yield roughly 1.5%. The bond market is pricing interest rates at only 0.25% above inflation in 20 years' time, says UBS Global Asset Management. Usually, that would indicate the global economy is heading for a deep depression.