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November 29, 2011



Doesn't QE have something to do with as well?


I hear a lot of people say that low yields might be either credit-worthiness or economic stagnation. It's the wrong way to think about it.

The right way is that it's a sign of relative credit worthiness (to other investment oppertunities). If other oppertunities have got more risky i.e. because of a recession, other things being equal bond yields will fall.

It doesn't really matter what's happened: Britain's relative credit worthiness has gone up. Yes it might have happened anyway, but so what?


QE1 stopped in early 2010. It's not obvious that it would therefore have reduced yields and raised share prices from May 2010 to the summer of 2011.
Nor is it obvious that QE should depress gilt yields. Yes, direct buying of gilts does so. But if QE works in reducing tail risk or increasing growth/inflation expectations,gilt yields should tend to rise, as should share prices. It's only because the latter effects are weak that QE does reduce yields net.


QE has restarted, so should be exerting downwards pressure again, but I think the issue is why they are lower than Germany, and the Bank being a large holder must help even when QE is not taking place.

I don't think I agree with the last point - it's too much like the argument you here that lower oil prices caused by a collapse in growth can boost growth. The Bank thinks gilt yields fell in response to QE.


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