2022 Exam Application Context - High and Low Bond Yields

In this video we look at example of countries where government bond yields are high such as Brazil and Mexico, contrasting that with low bond yields in Germany and the UK.

The yield on a bond is effectively the rate of interest that a government must offer to purchasers of new issues of government debt.

In some countries such as Brazil, the yield on 10-year government bonds is very high (over 12%) and likewise in Mexico (9%) and India (7%). Inn part this is because of the higher risks that investors face when buying government debt.

These risks include:

• i)Currency risk – volatile currencies carry risk
• ii)Default risk – there is a danger that the government might default on some loans
• iii)Inflation risk – the real value of bonds is reduced when they mature in high inflation countries

High bond yields make it expensive for a government in a country such as Brazil to borrow as part of fiscal policy.

In contrast, bond yields in countries such as Germany, the UK and the USA are very low. These nations have better credit ratings and carry less risk for investors.

Bond yields are rising in the majority of countries because of the surge in global inflation. This is significant because the10-year government bond yield is considered the benchmark for rates on all sorts of mortgages and loans.