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British gilt yields fall to lowest since 1890s

Ten-year UK gilts last paid similar levels of interest when Queen Victoria was celebrating her diamond jubilee

If there was a fin de siècle feel to Thursday’s market plunge, the bond markets showed it more than any other.

UK government bond yields – the rate at which the UK government borrows money – plunged to their lowest levels since the 1890s.

Ten-year gilts were paying an interest rate of 2.24% at one stage. The last time a UK chancellor could borrow so cheaply, his name was Sir Michael Hicks Beach, and Queen Victoria was celebrating her diamond jubilee.

Historians differ on the exact rates of government borrowing for the 1890s. Bank of England figures suggest that annual average yields on UK consols, as gilts’ predecessors were known, were as low as 1.96% in 1897.

Sidney Homer and Richard Eugene Sylla, in their book A History of Interest Rates, suggest the low was 2.21%, but agree that it came in 1897, the year Oscar Wilde was released from jail, children’s author Enid Blyton was born and Mark Twain famously wrote: “The report of my death was an exaggeration”.

Rates fell nearly as far in the aftermath of the second world war, to around 2.5%.

Thursday’s plunge in UK bond yields is in one sense good news for Hicks Beach’s current successor, George Osborne, who will be able to borrow money more cheaply.

But the bigger concern will be that low gilt yields reflect a headlong rush from riskier assets, in the expectation that growth is slowing fast and the UK and other developed countries may be heading for a double-dip recession or worse.

If a recession is coming and corporate profitability is hit, investors reason, it is better to buy gilts and preserve cash, even in an inflationary environment, than to hold on to falling shares. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds