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Ten-year UK government bond yields rose significantly between August and October. A model-based decomposition suggests that while part of the recovery reflected global developments, UK-specific factors played an important role.
Ten-year UK government bond yields rose by just 300 basis points between January and October 2022 (Chart A). Most of this movement – about two-thirds – has taken place since August.
Chart A: Decomposition of changes in 10-year UK nominal government bond yields from early 2022 (a)
Footnotes
- Sources: Bloomberg Finance LP, TradeWeb and bank calculations.
- (a) Method based on Rigobon (2003). The orange ‘global’ bar combines identified shocks from the euro area, Japan and the US. See Raczko et al (2017) for more details. Data is weekly and the latest data point is for the week up to 20 October 2022.
Other advanced-economy yields, such as those in the US and the euro area, also rose during this period. Movements in these yields are typically highly correlated across countries, making it challenging to identify the impact of specific regional shocks.
One approach to address this problem, based on Rigobon (2003), uses changes in asset price volatility (so-called ‘heteroskedasticity’) to identify country-specific shocks. Regression analysis can be used to identify when a particular region is experiencing particularly high or low price volatility in response to a shock, and to estimate the degree of volatility in asset prices across regions.
Using this model to decompose recent movements in 10-year UK gilt yields, bank staff estimate that while part of the repricing is due to shocks in other regions (labeled ‘global’ in Chart A), UK-specific factors will become increasingly important from August onwards. played a role.
According to market contacts, these UK factors reflect both risks and news about the central case, including higher central expectations for bank rates, political and economic uncertainty associated with government financial announcements and market volatility.
In the period leading up to the November meeting of the Monetary Policy Committee, gilt yields had fallen somewhat from their peaks. According to the model, this was driven by a decline in the UK-specific component (Chart A).
This post was prepared with the help of Akash Mankodi and Amarjot Sidhu.
This analysis was published in the November 2022 Monetary Policy Report.
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