The yield on gilts is not at any type of high

Given our well known love of contrarianism around here we’d just like to point out that the yields on gilt are not at a high:

The UK's bond market is collapsing:

Today, the yield on a 30Y Bond in the UK rose to 5.64%, its highest level since 1998.

This is not usefully true. That is the nominal yield. Now, nominal is important for cashflow reasons, yes, but as the Britih government won’t run out of pounds that’s not hugely important. We could also mutter something about how inflation bolsters the public finances through the abhorrence of fiscal drag.

What does matter is real yields. And there, well, matters are different. UK CPI is 3.8% by the latest read. The 30 year Gilt is at 5.6%. A 1.8% real rate therefore.

The French 30 year bond yields 4.42% apparently. French CPI is 0.9%. A 3.5% (-ish) real yield.

So, lending to an Englishman carries a lower risk premium than lending to a Frenchman. The world is stable and ordered, as it should be.

And contrarianism - and jocularity - aside there is a proper lesson here. Which is that it is not that Gilts yields are too high, it’s that inflation is too high. Therefore we need to continue with quantitative tightening, in order to get the money supply down. We need higher interest rates - which QT will aid - in order to subdue inflation. We need to cut the vast - 5% of GDP - budget deficit in order to reduce the stimulatory effect of spending more than received.

Sure, sure, the policy prescription from high gilts yields is the same as those moaning about nominals put forward. But by looking at the reals we can see why - Britain’s problem is inflation therefore we require less stimulatory monetary and fiscal policy to bring that inflation down.

Tim Worstall