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3rd London Olympics sees UK bond yields back at 1908 levels

Economic growth
By Paul Hodges on 24-Jul-2012

UK gilt Jul12.pngThis week marks the opening of the 3rd London Olympics. To celebrate, the blog today looks at developments in government bond yields since the 1st London Games in 1908. On Thursday, it will look at GDP per capita changes since the 2nd London Games in 1948.

In 1908, UK interest rates were the benchmark for the world. And as the chart shows, based on Barclays Equity gilt study data, they averaged 2.9% during the 1900s. In 1908 itself, they were 3%. Today, long-dated 30 year government bonds yield exactly the same amount.

In fact, as the chart shows, rates have always been around this level, with the exception of the 1970s-1990s. Many commenators make the mistake of focusing on recent history, and argue that higher yields are ‘normal’.

But they are not. It was only the arrival of the BabyBoomers (those born between 1946-70) that created a major increase in demand as we moved into the 1970s. The rise in UK births was quite astonishing:

• They averaged 784k between 1921 – 1945
• They jumped 15% to 901k in the next 25 years, 1946 – 1970
• Since then, they have fallen 17% to average just 744k

Unsurprisingly, bond yields have fallen back to historical levels again.

Equally, fewer people in the Wealth Creator 25 – 54 age group means that overall demand levels will be lower. Plus, UK life expectancy has risen from 50 years in 1908 to around 80 years today.

This means 18m people, 28% of the UK population, are now in the New Old 55+ age group. They need to save more, and spend less, in order to finance their extended life span.

As we argue in Boom, Gloom and the New Normal, demographics drive demand. Those companies who adapt to the changes underway will win the medals in years to come.