Summary of Quarterly Bulletin
May 2000

Research work published by the Bank is intended to contribute to debate, and is not necessarily a statement of Bank policy.

A comparison of long bond yields in the United Kingdom, the United States, and Germany (96k)
For most of the past 30 years, investors have demanded a higher nominal rate of return on UK government bonds (gilts) than on either German or US government bonds (Bunds and Treasuries respectively). The gilt-Treasury and gilt-Bund spreads reached a peak of around 8 percentage points in 1976 (using quarterly data). Since then, however, the size of this yield premium on gilts has declined steadily; in February 2000, the redemption yield on the 5¾% Treasury Stock 2009 (the current benchmark ten-year gilt) fell below the comparable German Bund yield. Furthermore, longer-maturity gilt yields are now well below comparable Bund and US Treasury yields.

This article begins by outlining the main determinants, according to economic theory, of these changes in relative bond yields. It then goes on to discuss what other UK-specific factors may have influenced the bond yield differentials in recent years.

Much of the decline over the past 25 years or so appears to be attributable to a fall in inflation expectations in the United Kingdom relative to inflation expectations in Germany and the United States. We find little evidence to suggest a convergence of real rates of interest or a secular decline in relative, country-specific risk premia. While much of the decline in the yield spreads can be attributed to changes in relative inflation expectations, we also believe that the dramatic decline in these spreads over the past three years cannot be entirely due to this. Instead, we believe that some of the recent decline is due to gilt market specific factors. Around one third of the decrease in UK-US and UK-German bond yield differentials observed since the beginning of 1997 has been, we suggest, related to a significant reduction in net gilt issuance combined with an increase in the demand for long-dated gilts from pension funds and life assurance companies. The evidence from long gilt yields does not appear to be consistent with EMU-convergence stories. Indeed, US forward rates are closer to euro rates in ten years' time than are UK forward rates.

Money, lending and spending: a study of the UK non-financial corporate sector and households
(64k)
(by Andrew Brigden of the Bank's Stuctural Economic Analysis Division, Alec Chrystal of the Bank's Monetary Assessment and Strategy Division and Paul Mizen, consultant to the Bank's Monetary Assessment and Stategy Division).
Many empirical studies over the past three decades or so have reported estimates of the determinants of consumption, investment and the demand for money. This article summarises recent Bank work that seeks to understand more fully the demand for bank and building society loans, and the interactions between these borrowings and the demand for money and decisions to consume and invest. This work aims to enhance our understanding of the links between the monetary sector and real spending decisions.

The main aim of this article is to assess whether the data on bank and building society lending to private non-financial corporations (PNFCs) and households contain information that could improve our understanding of the links between monetary policy and aggregate demand.

The article demonstrates that it is possible to estimate relationships that explain lending to firms and households, and that lending is driven by the same factors that drive the more intensively researched categories of money demand, consumption and investment. The results have improved our understanding of the links between money and credit and the spending decisions of households and firms. There do appear to be significant interactions between lending to firms and households, and money, consumption and investment. The estimated system of equations potentially gives a framework that helps us to interpret the likely impact of observed credit growth on future spending. These estimates are tentative and require further empirical verification. Notwithstanding these reservations, channels that involve credit as well as money balances appear to matter for the transmission mechanism of monetary policy.