Week 19, 2011: Government Bond Yields

Summary: The coalition government in the UK is one year old this week; we take a look back at the movement of the bond markets over the past year.

What does the chart show? Government bonds are loans made by private investors to a national government. The chart above shows the percentage yield (the interest rate on the loan) on new 10-year bonds, at the end of each month. The blue line shows the yield for the UK government. The red line shows the average yield for US, German, French and Japanese bonds. The dotted line shows the difference between the two.

Why is the chart interesting? Bond yields are generally considered to represent investor confidence in an economy, although as you can see from the chart above, bond yields from different economies tend to be relatively synchronised. The two main factors reflected in the yield are inflation expectations and the likeliness of the government to default on its debt (which is generally extremely low). Since the yield represents the cost of borrowing money from the private sector, a lower yield reflects better on an economy.

UK government bonds started out from a higher point than all the other included economies, but fell sharper in the summer of 2010 than the rest, perhaps in response to the government's emergency budget. Between then and February 2011, however, yields rose relative to other countries, probably reflecting concern over poor GDP and inflation figures over this period. Over the past couple of months since the official government budget, however, the gap between the UK and the average has been closing to the lowest point over the whole year, which reflects well on the coalition.