At first glimpse it appeared that the BOE may be making some progress in the current war against deflation. The 2 year gilt yield has doubled from .08 to .16 month-to-date. The 1 year has also doubled (from .11 to .22) and the 3 year yield has increased from .14 to .21. Here's the chart of the short end of the UK bond yield curve for the month of August:
The BOE may not hold the territory gained for long however. The 2 and 3 year durations have already reverted course and the 3 and 6 month durations have remained flat. If we look at yield curve in its entirety and expand our time window out to the beginning of the year, the current yield increases in the short end don't look like much more than noise.
The discussion in the UK continues to revolve around excessive debt both, public and private.
Case in point is this Aug 23rd Financial Times article:
That said, there is a risk that a wider point on the eurozone is being missed. This recession is all about debt. And there is an important lesson to be gleaned from Japan, whose supposedly dismal economic performance over the past two decades is beginning to look rather good in the light of current events. It is that the way to stave off slump is to have a supportive global economic backdrop that allows the export sector to drive the economy while domestic demand is deficient. That is just what the UK and other heavily indebted countries do not have, as the eurozone looks set to topple back into recession.
What also emerges clearly from the numbers on the UK economy this year is the tortuous and protracted nature of any recovery in which both government and households need to bring down debt – deleverage, in the jargon. This applies across much of the developed world. The Bank for International Settlements, the central bankers’ bank, reckons that in most advanced economies, the fiscal budget excluding interest payments would need 20 consecutive years of surpluses exceeding 2 per cent of gross domestic product just to bring the debt-to-GDP ratio back to its pre-crisis level
Talk of reducing debt, either through default or the lengthy process of paying it down, is the hallmark of a deflationary period. Minor fluctuations aside, we anticipate rates in the UK and many other locales to be low for some time to come.
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