Working Paper no. 126
By Nicola Anderson and John Sleath
This paper presents some new estimates of the UK real and nominal yield curves. These estimates are derived using a spline-based technique put forward by Waggoner (1997), modified for the UK government bond markets. At the short end of the nominal yield curve, additional data are included from the GC repo market. Estimates of the real yield curve are derived from the prices of index-linked gilts within a modified version of the framework put forward by Evans (1998). It is found that the new yield curves outperform existing methods on a number of criteria that are designed to examine the suitability of estimates for the purpose of assessing monetary conditions. In particular, the estimates are found to be smooth across maturity while having sufficient flexibility to describe the shape of the curve at shorter maturities where expectations are relatively precise. The curves are also robust to small errors in the data.