Is this the end of yield?

A feature of my career has been both lower interest-rates and bond yields. There have been many occasions when it did not feel like that! For example I remember asking Legal and General why they were buying the UK Long bond ( Gilt) at a yield of 15%. Apologies if I have shocked millennial and Generation Z readers there. There was also the day in 1992 when the UK fell out of the Exchange Rate Mechanism and interest-rates were not only raised to 12% but another rise to 15% was also announced. The latter by the way was scrapped as that example of Forward Guidance did not even survive into the next day.

These days the numbers for interest-rates and yields have become much lower, For example it seemed something of a threshold when the benchmark UK bond or Gilt yield crossed 2%. That was mostly driven by the concept of it being at least in theory ( we have an inflation target of 2% per annum) the threshold between having a real yield and not having one. The threshold however was soon bypassed as the Gilt market continued to surge in price terms. So much in fact that we moved a decimal point as 2.0% became 0.2%. In fact it is very close to the latter ( 0.22%) as I type this.

What happened to the Bond Vigilantes?

We get something of an insight into this by looking at the case of Italy. In the Euro area crisis we saw its benchmark bond yield rise above 7% and if we compare then to now everything is worse.

In the second quarter of 2020 the Gross Domestic Product (GDP) was revised downwards by 13% to the previous
quarter (from 12.8%)………In Q2, Gross disposable income of consumer households decreased in nominal terms by 5.8% with respect to the previous quarter, while final consumption expenditure decreased by 11.5% in nominal terms. Thus, the saving rate increased to 18.6%, 5.3 percentage points higher than in the previous quarter.

That is from the Italian Statistics Office last week. It has been followed this week by this from the IMF.

The International Monetary Fund on Tuesday raised its Italy GDP forecast for 2020 to -10.6%, from June’s -12.8%.
That is an improvement of 2.2 percentage points.
But the IMF cut its Italian growth forecast for next year.
GDP is now expected to rise 5.2% in 2021, 1.1 percentage points lower than the 6.3% forecast in June. ( ANSA)

So the IMF have made this year look better but taken half of that away next year. Actually it makes a mockery of the forecasting process because if you do better then surely that should continue? But, for our purposes today, the issue is of a large fall in economic output in double-digits. This especially matters for Italy because we know from our long-running “Girlfriend in a Coma” theme that it struggles to grow in the better times. So if it loses ground we have to question not only when it will regain it but also if it will?

Switching to debt dynamics ANSA also reported this.

The IMF also said Italy’s public debt will rise to 161.8% of GDP this year, from 134.8% last year, and will then fall to 158.3% in 2021 and 152.6% in 2025.

Those numbers raise a wry smile as we were told back in the day by the Euro area that 120% on this measure was significant. That was quite an own goal at the time but now it has been left well behind. As to the projected declines I would ignore them as they are a given in official forecasts but the reality is that the numbers keep singing along with Jackie Wilson.

You know your love (your love keeps lifting me)
Keep on lifting (love keeps lifting me)
Higher (lifting me)
Higher and higher (higher)

Actually Italy has over time been relatively successful in terms of its annual deficit but not now.

The IMF sees a budget deficit of 13% this year and 6.2% next, falling to 2.5% by 2025.

In a Bond  Vigilante world we would see a soaring bond yields as we note all metrics being worse. Whereas last week I noted this.

Italian 10-Year Government #Bond #Yield Falls To Lowest In More Than A Year At 0.765% – RTRS

This represents quite a move in the opposite direction from when the infamous “‘We are not here to close spreads. This is not the function or the mission of the ECB.’” quote from ECB President Christine Lagarde saw the yield head for 3%. That was as recent as March.

Monday brought more of the same.

Italy‘s 10-year and 30-year sovereign bond yields have dropped to all time-lows of 0.72% and 1.59%, respectively. ( @fwred)

Actually the bond market rally has continued meaning that at 0.64% the Italian benchmark yield is below the US one at 0.72%. This has led some to conclude that Italy is more creditworthy than the US, but perhaps they just have a sense of humour. John Authers of Bloomberg puts it like this.

Forza Italia! The Italian spread over German bunds is the lowest in three years, while the yield on Italian bonds is the lowest since at least 1320: (h/t Jim Reid, @DeutscheBank


Take care with the last bit because if I recall my history correctly Italy began around 1870.

But the fundamental point that Italy illustrates is that the Bond Vigilante theme relating to economic problems is presently defunct. In fact we see the opposite of it in markets as you make the most money from markets which start with the worst prospects as there is more to gain.

What about exchange-rate problems Shaun?

This is a subtext which does still continue. Only on Monday we noted that Turkey had to pay 6.5% for a US Dollar bond. Some of the exchange-rate risk is removed by issuing in US Dollars but not all because at some point Turkish Lira need to be used to repay it. But 6.5% looks stellar right now. There is also Argentina where yields are between 40% and 50%.

These are special cases where the yields mostly reflect an expected fall in the currency.


I have looked at Italy in detail because it illustrates so many of the points at hand. It should be seeing bond yield rises if we apply past thinking styles but we are seeing its doppelganger. The situation is very similar in Greece where the benchmark bond yield is 0.78%. If we look wider around the world we see this.From Bloomberg.

JPMorgan Chase & Co. says the stockpile of developed sovereign debt with a negative yields adjusted for inflation has doubled over the past two years to $31 trillion.

As the Federal Reserve prepares to let prices run hotter to fix the pandemic-hit labor market, the Wall Street bank has a message for investors: Get used to it.“Despite how logic defying the phenomenon is, negative real yields will likely stay with us for a long period to come,” wrote strategists including Boyang Liu and Eddie Yoon.

Adding in inflation means that the situation gets worse for bond owners. There is a familiar theme here because those who own bonds have had quite a party. But the hangover is on its way for future owners who see a market where the profits have already been taken, so what is left for them?

I have left out until now the major cause of the moves in recent times which has been all the QE bond buying by central banks. An example of this will take place this afternoon in my home country when the Bank of England buys another £1.473 billion. The market price for bonds these days is what the central bank is willing to pay. If you can call it a market price. Next comes the issue that countries are relying on this and here is the Governor of the Bank of Italy in Corriere della Sera

Then there is the average cost of debt. Right now it’s 2.4%. It is a high value.

2.4% high? So we arrive at my point which is that the central bankers will drive yields ever lower and as to any turn it will require quite a change as they sing along with McFadden & Whitehead.

Ain’t No Stoppin Us Now!
We’re on the move!
Ain’t No Stoppin Us Now!
We’ve got the groove!

15 thoughts on “Is this the end of yield?

  1. Hello Shaun,


    “The rule is, yeilds to-morrow and yeilds yesterday—but never yeilds to-day.”
    “It must come sometimes to ‘ yeilds to-day,’” Alice objected.
    “No, it ca’n’t,” said the Queen. “It’s yeilds every other day: to-day isn’t any other day, you know”


    PS: i guess this is why we will be able to empty pensions pots…… they will just get smaller every day no matter how much is put in …..

    • Hi Forbin

      So the pension pot change that was mooted was in fact a cunning plan. Invest your pension in property before your pension value falls……..

      The investment industry will not like it though. They will be deprived of large amounts of fees and charges.

  2. It has always been a policy decision of the UK govt to pay money to holders of its £ liabilities just for holding its liabilities.

    There might well be good policy reasons for paying money to those that hold govt liabilities – holders are generally, banks (reserves), insurance companies (gilts), those with pension savings (gilts) and just households with savings (NS&I and physical cash) and, of course, those foreign entities that have chosen to hold £ denominated assets (foreign central banks spring to mind that hold gilts or deposits at the BofE). There might be some very good reasons why the government should provide the above with an income to spend or to grow their savings. Conversely, there might be better policy reasons to pay money to those other than those that already have money.

    The govt has a debt – issues liabilities – so that we, being everyone that isn’t the govt, that chooses to transact in £, can hold net financial assets denominated in £. The debt needs to be as large as the net £ savings that we desire to hold AT A GIVEN RETURN. It is most likely that if the government chooses to pay more to holders of its liabilities, demand for its liabilities will increase, which can only be met by the government choosing to run a bigger deficit. It could, of course, fix the return that it is prepared to pay to holders of its liabilities (zero springs to mind, or as Shaun references, 2%, being the govt’s own inflation target) and let us decide how many of the govt’s own liabilities we wish to hold AT THAT RATE OF RETURN. The govt can then add its own liabilities if required by running an appropriate sized deficit and drain its liabilities if necessary by running an appropriately sized surplus. Because we tend to always wish to increase our net £ savings, it is most likely that the govt would need to run constant deficits (which it should manage to do!), but it can always decide what rate of return to pay to holders of its liabilities (which could be zero). The bond vigilantes are but mythical creatures.

    It should be noted, of course, that none of the above applies to Italy or Greece since they have chosen to give up sovereign control of their currency.

    • Since the Govt. issues index-linked bonds, why would there be a market for bonds at a much lower yield other than:
      a) money laundering?
      b) corrupt abandonment of fiduciary duty by fund managers.

      • it’s because pension funds, particularly, like to hold linkers (I like to hold them as well).

        They (and I) like to hold them because if inflation ticked up, the government would pay them (and me) more money. Why wouldn’t I want to hold them? As a saver, my big risk is an increase in the price of the stuff I will want to buy with my savings in future years. Linkers insulate me from that risk.

        But it’s a policy decision of the government to issue its liabilities in a form that pays a higher return if inflation is higher. The government doesn’t have to issue them and has, indeed stopped issuing index linked NS&I products to new buyers. The government effectively provides insurance to those with pension savings to protect them against inflation. Now, that might be a good policy decision to do that. It might be beneficial to society as a whole if we all effectively insulate savers from the effects of inflation. As an aside, did you know that BofE staff pension fund is almost entirely invested in Index Linked Gilts?

        Don’t get me wrong, as a holder of quite a few government liabilities myself, I would quite like it of the govt took a decision to pay 5% or 10% or whatever to me (and throw in some inflation protection as well, why not). Why wouldn’t I like that? But whilst it would suit me personally, I really do struggle to come up with many reasons why that would be a good policy decision for the whole of society.

        So what should the government pay to holders of its liabilities? I can make a very good case for ‘nothing at all’. I could also make a good case for 2%, given that is the government’s own inflation target (which is possibly a target that should be reviewed every now and then). In addition, as a holder of govt liabilities I could try to make an argument along the lines that paying me nothing, or a very low rate of interest, is grossly unfair on poor people because of asset prices or something and the only way to tackle that inequality is to pay me 5% or more. But I won’t. I would be too embarrassed to do so. It seems though, there are plenty like me who aren’t as shy in trying to make that argument.

        • I think you’ve misunderstood my point, which was, why buy OTHER than index-linked bonds, especially in countries like Italy?

          • Oh, I’m sorry. I didn’t get your point at all!

            I see what you mean now. Seems the BofE pension fund agrees with you! You would buy nominals, though, if you believed inflation was going to be less than that implied by the linker/nominal breakevens

  3. Shaun,
    Seems Amazon has avoided our digital tax but charging other traders on their site to cover these new costs – so it appears some organisations can still yield more profits!

    • Hi Chris

      Yes good point. It looks as though this tax was badly designed and conceived. For those unaware of the issue here is The Times on it.

      “However, The Times has learnt that Amazon, whose total British tax bill last year was £293 million on sales of £13.73 billion, will not have to pay the levy on goods it sells itself. Instead it will have to pay the 2 per cent charge only on revenues it receives from third-party sellers that pay to use its marketplace platform.

      Amazon has announced that it will pass on this cost in higher fees, in effect meaning that it will not be liable for the charge and so gaining a competitive advantage over smaller retailers that use its platform.

      Last night business groups accused HMRC of designing a tax that cemented Amazon’s market dominance while failing to ensure that it paid its fair share. A senior tax lawyer described the digital services tax as a “political failure and economic failure”.

      Lord Leigh of Hurley, the Conservative peer and former party treasurer, called for a rethink. “This seems to me to be absolutely outrageous,” he told the Lords. “It is clear that the UK government is not taxing Amazon properly and is allowing it to avoid tax on its own sales through the marketplace.”

  4. i remember interest rates in the high double digits in the mid to late 70s but inflation was higher as well.

    But the coronavirus has decimated world economics and no one can forecast where yields will go while we know the damage its going to cause or we learn to live with it.

    There is a caveat however and that is the UK in particular has seen some of the most economic damage and it needs low or negative yields imo in order to spend on infrastructure projects to boost UK GDP.

    What is quite stark is its presumed the virus came from China yet its been reported earlier that China doing quite well selling electronics and the UK population working from home and indeed spending more time at home, spending their cash on electronics and DIY!

    Without getting into conspiracy theories which I normally don’t it does make you think on this one as to whether the virus was leaked deliberately. I happen to think it was an accident but I am prepared to be swayed the other way.

    Low yields normally mean low borrowing costs so long as people not on a fixed rate but so far as the government is concerned its beneficial to borrow and spend.

    With more lockdowns in the North and I think more will have to be done throughout the UK yields need to be low.

    I still expect UK base rates to be cut further which I have said a number of times and did expect a cut at the November meeting however I am dithering now only because the BOE writing to the banks and expecting a reply after the BOE meeting on rates. It still leaves the BOE to go to zero in November however and I think they shouuld.

    • Let’s be honest, it wasn’t coronavirus which destroyed World economics, it was the reaction.
      Whether or not you really believe that reaction to be proportionate is a different matter, but coronsvirus hasn’t wiped out workers or consumers.

      • This is still being debated but with no lockdowns our hospitals would become overwhelmed in fact up North they are about full capacity at the moment.

        I hear what did in has to say about Sweden but we went Sweden just look at the covidiots in Liverpool yesterday who took to the street having a celebration prior to lockdown and also looked like they were laying siege to s police vehicle.

        This wouldnt have allowed to happen in china.!

        Hands face space is the answer but the selfish Brits and particularly the young don’t want to be told what to do.

        More draconion measured will have t o be implemented otherwise out hospitals wil not be able to cope.

        Best son mind more hospital admissions and more people with other health ißues will not be able to be treated..

        Having relied on hospital treatment myself lately as a patient with unrelated issues so know how complex and serious all this is and the risk the NHS take.

        There is no easy answer to all this and only time will tell whether we have acted the right or wrong way.

        I happen to think we need to think about new ways of running the UK economy and allowing some odd,the of the hospitality to go under and no more subsidies such as furlough and expect some thumbs down on this point.

        • Our hospitals were overwhelmed; they were A&E & coronavirus with everywhere else running (at best) a skeleton service, during which many people were denied or seriously delayed, life-lengthening cancer-treatment (including someone I know who died) & investigative cancer procedures (my spouse, who, fortunately was given the all-clear).
          TPTB will only get 2 general lockdowns though, before people will be rightly able to say that if, as soon as lockdown ends, the infections number spikes, it is obvious that lockdowns don’t work, & that the resistance to a third will be tenfold what it is now.
          Chairman Mao called the suppression of the People, “Stirring a pot to stop it boiling.”

        • Furloughs are not there for the benefit of the payees; they are there for the benefit of those in whose debt they are; namely, the banks.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.