UK borrowing rates – lowest since William of Orange
If you’re after one striking fact that shows you just how topsy-turvy are the economic times we’re living in, perhaps this one will do the trick. Despite having one of the biggest deficits in the Western world; despite worries about the sustainability of this debt and our capacity to pay it off, Britain’s government can currently borrow at the cheapest rate in history.
To get a sense of how significant this is, consider the graph above, and more specifically the timescale on the x axis. Since the creation of capital markets in the late 17th century (before which the UK rulers tended to scrounge off goldsmiths and embattled nobles), the benchmark government borrowing rate has never been as low as it is today – a staggering 1.574% for a 10-year loan.
Consider that this is net of inflation – in other words, if inflation is above 1.574%, (CPI is currently about double that, RPI even more) and you realise this involves investors consciously accepting real erosion of their investments. It spells a lot of things, but above all else it spells sheer fear that pretty much every other major asset out there is treated with serious paranoia right now.
UPDATE: Fri 1 June: The 10-year rate has now dropped beneath 1.5%, and every major maturity, eg all the way up to 30-year bonds, is yielding below 3% for the first time ever.
US – Lowest Since Colonial Era
And it’s not just Britain. This chart compares the UK and US 10-year government borrowing rates.
And what’s striking is that despite the fact that, so far as many economists such as Paul Krugman are concerned, the two Anglophone countries are following such radically different fiscal policies, investors simply do not care. They are charging both Britain and the US almost identical rates for borrowing.
I’ve done a little bit of scouring through records of historical interest rates and by my reckoning (the source here is A History of Interest Rates by Homer/Scylla) the US has never had benchmark interest rates as low as they are today. Since Massachusetts first experimented with issuing government debt in 1690 (to pay colonial wars), all the way through to Madison and the modern Federal bond market, the lowest US bond yields reached was 2.53% just after WWII in 1946.
You can see the two relevant tables from Homer/Scylla below. At the time of writing, the 10-year bond yield is down at 1.546%