Today, we are launching our Economic Theme Of The Week series!

Each week, Mrs Hyde, Head Of Economics, will address and explain a current topic on the theme of Economics. Our series begins with the question: What do rising bond yields mean?

‘Bonds are essentially I.O.U’s. making large-scale borrowing by governments and firms possible. Before bonds became virtual, they were pieces of paper stating how much is owed, how long for, and how much interest will be paid (the ‘coupon’). Such bonds are initially sold to investors at auctions, but afterwards they can be traded many times in the ‘Bond Market’ where their price changes over time. The extra money that the Bank of England and other central banks have been creating to stimulate economic growth encouraged the buying of assets like bonds. That demand raised bond prices up to last summer, but their ‘yield’ – the coupon as a proportion of the bond price – fell. For example, in August the yield of a 10-Year UK government bond was less than 0.6%. This doubled to nearly 1.2% last week, making borrowing twice as expensive. The UK’s good economic growth between July and September may cause prices to rise too, and so markets think that the Bank of England may slow its rate of money creation. Bond prices fall without the extra demand, leading to a higher yield. Governments, firms and households pay more to borrow but savers get a higher reward – if inflation does not eat away at it.’

Make sure to check back for next week’s theme!