UK bond yields return to historical levels

Economic growth

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Consols Jan13.pngAre you worried about the future direction of interest rates, and what they may mean for your pension, your family and your company?

Then the chart above, showing 300 years of UK government bond yields, may just be helpful. It will probably also surprise you, as it contradicts the opinions of most ‘expert commentators’. These mostly argue that western government bond yields are in a massive ‘bubble’ and are sure to soon increase, perhaps dramatically.

The chart is thus a demonstration of the wisdom of the British statesman Winston Churchill, who argued that “The farther back you can look, the farther forward you are likely to see”.

It is based on official Bank of England data, and shows the yields paid on government debt (known as Consols) since 1703. This includes two world wars and several European wars, as well as major booms and depressions. Through it all, yields have averaged just 4.49%, very close to current levels – which average 4.61% since 2000.

Interestingly, for those who follow the blog’s argument about the importance of demographics for financial markets, there was just one 50-year period when the averages moved higher. This was between 1950-99 (red highlight). Rates then shot up across the western world, as demand increased with the arrival of the BabyBoomer generation. The peak was seen in 1970-90 with rates averaging 11.1%, more than twice the historical level.

Today, of course, this surge in demand is being replaced by a decline. Deflation, not inflation, is now the key risk for the economy. More than a third of the western population is now over 50-years old, when spending reduces quite sharply as people begin to prepare for retirement.

The ‘experts’ are thus likely to be completely wrong in their forecast, unless the risk of default increases. Their mistake is to assume their personal experience since the 1970s represents ‘normal’. They thus ignore Churchill’s great insight on the value of a historical perspective.

Update. New FT video. The Financial Times has produced an excellent new video today (Friday). Norma Cohen, demography correspondent, uses the above chart to ask the question “What is Normal?”. Please click here to view the interview.

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