UK bond yields - why so low?

When the government still has to borrow an extra £90bn per year, in spite of all their efforts to cut spending, then the rate of interest they need to pay in order to get access to that borrowing has got to be very important. George Osborne certainly thinks so; a key reason for his deficit-reduction strategy is to retain the confidence of the bond markets, so that bond-buyers are prepared to lend to the UK at low rates. This week, that rate touched a historic low of 1.396 per cent on 10-year bonds, and as the FT report, longer term 30-year gilt yields, considered particularly reflective of the country’s inflation prospects, also dropped to a record low of 2.102 per cent.

It may help students to understand the bond market and its interrelationship with low interest rates to read that article. The analysis is wide-ranging, looking at the downward cost-push effect of oil and food prices, the ECB's QE programme, signals from the MPC, and pessimism about global growth. Robert Peston's blog considers these aspects as well, and extends the question to question whether the government should take advantage of such low rates and borrow more in order to fuel spending for a recovery, or whether it is more sensible to see it as an opportunity to reduce the deficit as fast as possible - a good opportunity for evaluation.