The cost of money for the UK government

The cost of 10 year money for the UK government has risen above 2.2% today.

This compares with the low point of just 1.4% hit in July 2012.

The cost has averaged 7.5% from 1980 to 2013, reaching a high of 16.1% in November 1981.

Clearly the recent Bank forecasts of less growth and more inflation are a worry to some investors.



  1. Jerry
    February 14, 2013

    More or less meaningless figures given by John (unless one is on the ‘inside’), the low point might well have been 1.4% in July 2012 (which may well have been around the time of the EU’s “We will do what ever it takes” statement) but what were they in 2011, 2009, 2005. Does anyone have a link to the complete set of figures in John’s cited period 1981 to 2013?

    But I agree, investors are getting more than a little jittery, time that No. 11 got their act together, stop trying to fit the solutions to a pre-conceived idealogical goal, the result might be the exact opposite come the next election and probably will me on this record!

    1. Nicol Sinclair
      February 14, 2013

      My comment is: “It’s time for the Kanzeler to take the Chiltern Hundreds and disappear from our screens and our lives – if he was ever there?

    2. zorro
      February 14, 2013
  2. Wilko
    February 14, 2013

    Inflation is less of a worry to those investors who foresee which items are prone to increase in price / value and invest in them at their earlier lower cost.

  3. Gary
    February 14, 2013

    If this feeds into the mortgage market, as it probably will, and house prices fall, that will (further?) impair the banks’ books.

    I think Carney, who created what some say is now the largest property bubble in the world in Canada, is the fireman who is expected to hose down rates with more QE.

    Either way , the worst lies ahead, not behind IMO.

  4. Nick
    February 14, 2013

    No one is lending to you, because they know they won’t get it back.

    The only buyer of Gilts is QE. Look at the data.

    What’s the plan to pay that back or is it just cancelling the Gilts the plan?

    “Clearly the recent Bank forecasts of less growth” – yep too much tax.

    “more inflation” – interest rates too low, and too much stealth taxes.

    1. Denis Cooper
      February 14, 2013

      QE stopped last November, since when the Treasury has been selling new gilts to private gilts investors without the Bank creating new money and using it to rig the gilts market by buying up previously issued gilts. It’s reasonable to assume that the main reason why market prices are now slipping and yields are creeping up is that for the moment the Bank is no longer rigging the market.

  5. Simonro
    February 14, 2013

    On the other hand, that’s still lower than current inflation, and lower than forecast inflation.

    Lending money to the government at the 10 year rate will likely see no return on investment, and possibly a small loss.

    I know, the government could borrow some of that money available to them (at effectively 0%) invest it in something that might grow the economy and create jobs (I’m sure you could come up with something), and then repay it with all the extra income and lowered expenses that less unemployment would cause.

  6. lifelogic
    February 14, 2013

    Indeed and negative growth even in Germany too now. I am surprised anyone wants to lent to the UK government at 2.2% for 10 year money. This with inflation at 3% and rising Labour due in 2015, borrowing out of control and government wasting cash hand over fist. Still there are some borne every minute I suppose.

    Time to cut spending and waste in the state sector by 50% and lower taxes, but alas Cameron is genetically a pro EU, tax borrow and waste, promise one thing do the opposite socialist.

    I shall be investing in real assets, not deflating pieces of government paper with Cameron and Miliband around.

    Still we would not want to be a greater Switzerland would we Cameron, with 10 year borrowing rates of about 0.5%.

    Not that they need to borrow very much.

    ( ref to an unchecked site deleted)

    1. Nick
      February 14, 2013

      I am surprised anyone wants to lent to the UK government at 2.2% for 10 year money.


      They aren’t, unless they are forced too.

      1. Bank’s capital
      2. Annuitants.

      They are actually a small part of the lending.

      It’s all QE. They have bought their own debt, and haven’t got a clue how to unwind the deal.

      1. lifelogic
        February 14, 2013

        Indeed forcing annuitant providers to lend to the state is just another way of robbing pension funds again. Yet another stealth tax.

    2. Nicol Sinclair
      February 14, 2013

      Lifelogic. Oh, how I agree. Time for the Chancellor to disappear into the far distant…

      1. John Maynard
        February 15, 2013

        I’m not as ambitious as you.
        I would be happy if we never hear another word from the awful, dismal failure Mervyn King.
        When was the last time he told us something we didn’t know ?
        When was the last time he made a speech, (with his inimitable negative spin), that did NOT cause markets and Sterling to decline ?
        He seems to be severely piqued that his candidate Paul Tucker was rejected, and on a mission to make things as difficult as possible for Carney.

        Please let Carney be measured and extremely frugal with his public pronouncements – as central bank governors are supposed to be.

        This country, it’s media and officials, have been busily talking down business and consumer confidence since 2010.

    3. lifelogic
      February 14, 2013

      I see that Sir John Major has said that Cameron was “right” to promise a referendum. In a recent typically tedious, irrational, I am speaking very slowly to dim 6 year old’s sort of speech.

      Would Sir John know what was right if it bit him on the bum one wonders. Was it right to take us into the ERM as chancellor, was it right for his government to say interest rates would go up if we came out of the ERM, was it right never to apologise for huge pointless damage, loss of businesses and homes and the many suicides the ERM caused. Was it right to ram Mastricht down the throats of the of the voters against their will and without their authority? Was it right to bury the Tory party for three + terms.

      I assume what he means is that Cameron was right to promise a referendum only after he will clearly not be able to deliver it.

      The only question left is will Cameron bury the party for three terms too or just forever perhaps? Anyway we will just be a department of the EUSSR by then. Thanks very much to Sir John.

  7. Pleb
    February 14, 2013

    Cyprus looks like being the next disaster

    1. Bazman
      February 14, 2013

      Are they running out of wine?

    2. uanime5
      February 14, 2013

      The Turkish or non-Turkish part? This is important as the EU only has to bail out the one that’s in the EU.

  8. James Reade
    February 14, 2013

    Can I encourage you and your readers back to Jonathan Portes again?

    Perhaps this post: ?

    Long term interest rates reflect inflation, but also growth rates. Hence the increase in the long term rates could be reflecting the increased confidence that at some point we will return to growth over the next few years. Growth tends to come along with inflation – which despite your protestations, is not necessarily a bad thing since in real terms over the long term, we have grown more since WWII despite higher inflation than we did before WWI.

    This post by Portes ( is particularly interesting for those who like to actually believe the things George Osborne says about interest rates.

    1. English Pensioner
      February 14, 2013

      Obviously you get growth if you get inflation, but it is illusionary.
      Suppose the value of money halves due to inflation, the cost of goods would double. Nobody would be able to buy any more so sales would remain static Yet there would be double the output in money terms that there was before the inflation. But actually, in real terms there would be zero growth.

  9. oldtimer
    February 14, 2013

    My expectation is that those rates will only increase from now on.

    What seems to be little understood is the extent to which this (and other) governments are requiring banks and insurance companies (and others?) to buy government debt to include in their reserves. The free market has been suspended and replaced with state coercion. It would be helpful if, and some point in the future, you were able to identify and quantify the extent of this coercion.

  10. Acorn
    February 14, 2013

    There you go JR, a country can’t live on currency and derivatives trading alone. Just think how much Osbo’ could make with a Tobin Tax. $5000 billion a day gross in global currency trading, over a third of it transacted in the UK. Nearly half of global interest rate derivatives transacted in UK. We could all retire to the Cayman Islands 😉 .

  11. Glenn Vaughan
    February 14, 2013

    Will someone at the Bank of England please put a large hobnailed boot up Mervyn King’s backside on my behalf?

    1. Nina Andreeva
      February 14, 2013

      Why what has he done to you? Personally all this liquidity has been absolutely great for me. I was only saying so to Dave, George and Boris in Davos the other day and they confirmed too that the underlying assets in their trust funds have also held up magnificently with QE. Remember its only little people who keep their money in the building society, so if they are effected by low interest rates thats their problem!

  12. Mark
    February 14, 2013

    I checked and found that the highest price for the 2022 gilt was on 25th July. I then valued the present QE gilt holdings (remember there has been a further £50bn of purchases since then, ending in October last year), to find the value of the portfolio would have been £405.8bn at the peak. I valued it again on 11th February, when it had fallen to £383.9bn, compared to £398.3bn in mid November. See my comments here:

    Revaluing the portfolio today it is down to £380.5bn. That is £25.3bn added to PSND including financial interventions since last July. It’s not looking like Osborne will be able to rely on raiding the piggy bank for coupon income to finance deficit spending if things continue like this.

    Also, on March 7th, the 4 1/2% Treasury Gilt 2013 is due to be redeemed at par, which will produce £6,110.7m of cash for the BEAPFF, against an original acquisition cost of £6,604.2m, for a crystallised loss of £493.5m. This cannot be hidden off balance sheet.

    Denis Cooper kindly pointed out that the BoE intends to spend £6.6bn on further gilts purchases when these gilts mature, as announced here:

    Whilst they will have £6.1bn from the maturing gilts, presumably they will actually print the £493.5m balance additionally?

    There are some very real questions to be asked. If the BoE simply intends to roll over QE funds, how do they ever plan to unwind QE? If they never plan to unwind QE, but instead to debauch the currency, why should there not be a sterling crisis?

  13. Nationalist
    February 14, 2013

    The UK CDS rate still seems under control at 52bp for 5-years. (France is 87bp, Germany 44bp). Does anyone have a feel for what this would need to rise to before we should start worrying?

    Also, since HM Treasury is helping itself to the coupon on QE’ed gilts a rising rate is actually beneficial to the public sector accounts!

    1. Mark
      February 14, 2013

      There is no benefit to the Treasury on the coupon income on the QE gilts that have already been bought. That is entirely fixed and predictable. You can calculate it for yourself using this spreadsheet:

      by multiplying the coupon (8%, 5% etc.) by the total nominal purchases for each gilt and adding up the total.

      Rising yields in fact have the reverse effect, because the Treasury indemnifies the BoE against losses on the QE portfolio while retaining rights to the profits. My calculations above show that since last July the value of QE gilts has fallen by over £25bn, and if it falls much further it will be below acquisition cost, meaning that the Treasury will have to forego dipping into coupon income in order to subvent the losses.

      1. Mark
        February 14, 2013

        I should add that the forecast additional new gilts to be issued for 2013/14 up to and including 2017/18 total some £742bn: the added cost of that borrowing is about £50bn as a result of the fall in yields.

        1. Denis Cooper
          February 15, 2013

          Rise in yields, surely?

          1. Mark
            February 15, 2013

            Indeed. Fall in value of the QE portfolio.

  14. Bazman
    February 14, 2013

    I’ve noticed that a large number of directors of large businesses often state owned and privately state owned, those that want to get paid, have an issue with paying taxes, interest, employes, fees, services, etc, but they love paying their bonuses.

    1. Edward
      February 15, 2013

      Its probably because its better to pay your self a dividend based on shares you hold rather than pay your self a bonus as income.
      You pay marginally less tax that way.

  15. Iain Gill
    February 14, 2013

    Get it fed through into mortgage rates and watch the house price collapse…

    Watch those banks with balance sheets which depend on current house valuations look shaky when those values drop

    Need the correction over and done with asap

  16. Antisthenes
    February 14, 2013

    Are we perhaps seeing the chickens coming home to roost. Are the markets waking up to the fact that fundamentals are not what current market values are based upon but rather the amount of cheap money available. This cheap money had no where to go to other than to financial markets as return from the real economy was riskier and less profitable. As was to be expected investors are now starting to worry that markets are grossly overpriced and large losses are now a serious possibility. Are the bubbles about to burst one consequence of which is that interest rates will rise which in turn cause the the cost of debt to rise which in turn will reduce government coffers. If this happens then we are going to see much more spending cuts which may lead to social unrest after all that what happens when you have a dependency society.

  17. Duncan Black
    February 14, 2013

    John, as a man of finance, would you please explain to me, seeing that we (the public) supposedly own the Bank of England, why on earth do we pay interest on the money we borrow from it?

    And secondly, again, as we supposedly own it (the BoE) why are its articles of association protected by Royal Commission? What is it about the BoE that is being hidden from us – the supposed owners?

    1. A different Simon
      February 15, 2013

      Duncan ,

      I too would appreciate an explanation .

      1. Duncan
        February 15, 2013

        Thanks for your support Simon. One of the reasons this issue remains is that the public is entirely ignorant of it. The more of us that motivate for it to be addressed the more likely it will be that we are successful.

        John – are you listening?

  18. alan jutson
    February 14, 2013

    I assume that the government is having to pay more to borrow more, thus our debt gets larger, which means the government has to pay more to borrow more ! which means……… !!!!!

    Oh why Oh why did not Osbourne tackle our problems with from the start with real cuts to government budgets, instead of tax rises for the masses.

    Did they really think that if they covered their eyes, it would all go away.

    1. Bob
      February 15, 2013

      “Oh why Oh why did not Osborne tackle our problems with from the start with real cuts to government budgets, instead of tax rises for the masses.”

      The UK would be in a much better place if Mr Osborne had stayed in retail, folding towels or perhaps gone into the family wallpaper business. If he prints any more money we might as well use it as wallpaper.

      What qualifications does he have to manage the economy, or even a whelk stall?

  19. Jon
    February 14, 2013

    The Eurozone average yield is also lower by a chunk.

  20. uanime5
    February 14, 2013

    Given that the economy contracted in 5 of the last 6 quarters and the UK is heading for a triple dip recession you can’t blame lenders for being jittery.

  21. Lindsay McDougall
    February 15, 2013

    The messages from the markets are clear: HM Government is not doing enough to cut the fiscal deficit in FYR 2013/14 and monetary policy is too loose.

  22. Steve Cox
    February 15, 2013

    As I predicted 6 weeks ago when John asked what we thought would happen this year, Sterling is collapsing and gilt yields are rising as a result. I didn’t predict that Mark Carney’s first challenge would be combating a global loss of confidence in our currency, but at the rate things are moving it may well be Mervyn King’s last challenge (and no doubt he will make a complete mess of that, too).

  23. Derek Emery
    February 15, 2013

    The increase from July 2012 is 57% in 6 months. If this rate of rise continues interest charges would be 3.4% in another 6 months. The UK has to borrow to make debt repayments. This is equivalent to having to use another card to make interest payments to repay debts you have accrued on your first card.

    I wonder if government risk analysts have ever calculated how high interest charges could rise with time even before the next election and at what stage would they become an embarrassment to paying back debt?

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