Ministers are using low gilt yields as a sign of coalition "credibility", yet low yields are a sign of undermined growth, explains Cormac Hollingsworth.
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Ministers are using low gilt yields as a sign of coalition “credibility”, yet low yields are a sign of undermined growth.
Following worse than expected recession numbers last week, Treasury minister Chloe Smith rejected criticism the government’s policies were failing, citing the “credibility” that the coalition had secured.
Their evidence for this credibility is the low gilt yields. And on cue, the gilt yields went to a new all-time low last Friday. But the problem is that the more the coalition undermines growth, the lower gilts go. If growth was expected to rise, gilt yields would also rise. Unfortunately the same time, lower growth means higher borrowing.
• No, Gideon, low gilt yields aren’t good news, and here’s why 16 Nov 2011
So it’s quite possible that lower gilt yields are more a sign of panic about the economy than sign of credibility about the deficit. And it turns out that every time the City raises its expectations about the total borrowing of the coalition over the course of this parliament, gilt yield falls.
Hard to believe? Take a look at our graph below:
It’s time for the media to stop swallowing the credibility line and start holding this government to account.
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32 Responses to “Lower gilt yields are a sign of panic not coalition credibility”
Duncan Stott
This is partly true. A lack of confidence in the private sector means investors preferring to lend to government.
However, there are plenty of other nations issuing bonds too, and at much higher rates relative to the UK. This indicates that investors have relatively more confidence in the UK government than other countries.
Lord Blagger
Lower Gilt yields aren’t the result of panic. If that were the case, Spanish, Portuguese, Italian and Irish yields would be a low levels.
In the case of Germany, low yields (zero) are as a result of supply and demand. Demand is very high, because they are safe, so there are large flows.
In the case of the UK, its different in one respect. Demand is high, hence the low price. However, you have to look at who is buying? It’s the government buying its own bonds via QE.
If that were the private sector, it would be making a false market and illegal.
You need to explain why the government is the only major buyer.
As for growth, it won’t solve the government debt problem. Do the maths. Government needs 150 bn a year to stand still. Who is going to pay that extra tax? What does that do for growth?
cormachollingsworth
You’ve shown why your counter example against yields and growth is not relevant. The reason why its different in Spain etc is the UK has its own currency.
Anonymous
So your answer is to go backwards rather than stand still. Well done!
Anonymous
They have more confidence that the UK government will need to continue to issue debt, yes. It’s seen as “safe”, but now VERY low-yield. The second is going to outweigh the first with many before many more years have passed.