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UK Bond Yields Climb above Italy and Greece

Graham Watson

27th September 2022

This is big news! Bond yields have gone up after Friday's mini-Budget to the extent that it is currently costing the UK government more to borrow than the government's of Italy and Greece. Just let that sink in.

Five-year bond yields are 4.6% in the UK compared to 4% in Italy and 4.1% in Greece, because international investors are worried about the higher risk of default on UK government debt although, it must be stressed that the UK has never defaulted on it in the past.

Here is a neat little primer on why bond yields matter - it's quite straightforward - bond yields rise as governments need to offer a higher rate of interest for investors to buy them because they're seen as a riskier asset.

As a result, government debt interest repayments rise, further compounded by the a lack of confidence in government policy, the war in Ukraine and the post-Brexit settlement and worries about Britain's inflationary response - with high levels of inflation eroding the real value of debt.

As a result, some worry about a feedback loop whereby a weaker currency fuels higher inflation and the need for ever higher interest rates, and yet more government borrowing, something more commonly seen in developing economies.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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