By Martin Brooke of the Bank’s Gilt-edged and Money Markets Division, and Andrew Clare and Ilias Lekkos of the Bank’s Monetary Instruments and Markets Division.
Long-dated gilt yields are currently well below the comparable German and US government bond yields for the first time in many years. This article considers what factors are likely to have contributed to these changes in nominal rates of return. We conclude that much of the decline in long gilt yields can be attributed to a decline in UK inflation expectations since the mid-1970s. However, we find evidence to suggest that gilt yields have more recently also fallen in response to a significant reduction in net gilt issuance combined with an increase in demand for gilts from UK institutional investors.