Bond Market Analysis by Lloyds TSB

The Bank of England caused some excitement in the bond markets this week, when one of the articles in the Quarterly Bulletin (QB) said that “…to the extent that savers in surplus countries may become more reluctant over time to invest funds in deficit-country government bonds this would tend to raise the cost of borrowing in deficit countries”.

The Bank of England Quarterly Bulletin causes a bit of a stir

• The Bank of England caused some excitement in the bond markets this week, when one of the articles in the Quarterly Bulletin (QB) said that “…to the extent that savers in surplus countries may become more reluctant over time to invest funds in deficit-country government bonds this would tend to raise the cost of borrowing in deficit countries”.

• One consequence has been to push gilt yields higher, with the 10-year benchmark hitting 3.80% yesterday for the first time in more than a month. At the short end of the curve, 2-year gilt yields have stayed low, because the Bank of England has not ruled out cutting the interest rate paid on commercial bank deposits. Moreover, the official Bank rate is expected to remain low for some time. The 2s/10s spread has therefore risen to 290bps. In the swaps market, 5-year swaps have risen back towards 3.40% and 10-year swaps above 4%, while 3-month libor fell to new lows.

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