The recent sharp rise in government bond yields, most pronounced at the long end, has fuelled concerns about its potential adverse impact on the economy. After all, since it has not been accompanied by an increase in equity prices or a fall in corporate bonds spreads, the rise in gilt yields has clearly not reflected growing optimism about the economic outlook.
However, gilt yields are still much lower than they were a year or so ago. In addition, the impact of the rise in gilt yields on borrowing costs in the real economy should be small, as most households and firms borrow at fairly short maturities. Meanwhile, past evidence does not support fears that UK yields will move in lockstep with US yields when the Fed begins to tighten monetary policy.
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