Home > Monetary Policy, Politics > Osborne’s Reverse Ferret on Gilt Yields

Osborne’s Reverse Ferret on Gilt Yields

I’m still catching up, and I didn’t see anybody pick up on this.  Team Osborne have long been champions of the “low gilt yields” ⇒ “confidence in government policy” ⇒ “austerity is successful” logic.  But read Osborne’s Mansion House speech, my emphasis:

And this brings me to the important question of how monetary policy should balance the ongoing need for stimulus with emerging signs of recovery.

Each step along the path must, without question, be for the judgment of independent central banks including our own. The sharp jumps in bond yields we’ve seen in too many countries in recent years have been a sign of confidence departing.

But if the recovery gathers strength then a steady rise in bond yields across the largest developed countries will be a sign of confidence returning.

The recent turbulence in financial markets has emphasised the vital importance of clear communication.

There is a risk that poor communication could lead to stimulus being inadvertently withdrawn too soon.

More clarity about the future path of interest rates could help keep financial markets more stable.

I don’t think Osborne has ever before claimed before that gilt yields are positively correlated with “confidence”.  This is a welcome development, but it does make a mockery of what he said before.  It is also interesting that the Chancellor is so openly – and apparently successfully – guiding the MPC towards “Plan Woodford”.

(Yes, “Reverse ferret” is a much better phrase than the clichéd “U-Turn”.)

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Categories: Monetary Policy, Politics
  1. W. Peden
    July 6, 2013 at 12:02

    Perhaps some of his advisors have been reading some good Market Monetarist blogs?

    • July 8, 2013 at 08:16

      I’d like to think that’s true!

  2. James in London
    July 6, 2013 at 18:52

    Hadn’t spotted George Osborne’s observations. Quite a different tune to the March Treasury investigation of alternatives to the existing monetary policy framework and the reliance on Goodhart’s Morgan Stanley piece dissing NGDP targeting.

    I guess that bit of the speech didn’t cause any headlines as it is so non-consensual, and weird almost to most people. I blame the bond investors who have had it easy for so long that their “success” means they dominate most debates on monetary policy. They actually have a really malign, austerian, influence on economic policy debates. Their morbid fear of any inflation has far too much weight in ECB circles, as they constantly applaud the record of Trichet and his ilk in combating inflation to the exclusion of all else.

    Bond investors’ 15 year outperformance over equities has made many careers and reputations. They are now scared witless by a genuine economic recovery and can cause rapid selling that many commentators believe must be a “bad thing” as it’s, well, selling. And the selling happens so fast it looks like panic selling, even. It probably is a bit of a panic, knowing how markets can herd at times and all want to get ahead of the curve.

    Market Monetarists know it’s really just a quickfire change in expectations for the good, and shouldn’t cause too much perturbation in equity markets, at least. That is what I am telling people. In so far as such bond sell-offs do cause wobbles in equities it is a wonderful, and genuinely rare, “buying opportunity”.

    • July 8, 2013 at 08:30

      That is interesting. I am unsure about the extent to which the “bond vigilantes” are a genuine influence over policy; are they more a convenient excuse for the “austerian” policies politicians always wanted to produce in the same way that Reinhart/Rogoff were used as an excuse?

  3. James in london
    July 7, 2013 at 20:09

    I should have said “a quickfire change in expectations HOPEFULLY for the good”. If it is just too rapid selling then it might be a sort of liquidity effect. But the selling is truly paradoxical on the back of a promise to ease for longer, ie continue with QE for longer. The fall in prices is just as market monetarism predicts, and no other theory can explain such a move.

  4. July 17, 2013 at 13:12

    Given that the bond yields also appear exq

  5. July 17, 2013 at 13:13

    d’oh – hit “enter” too soon.

    Given that bond yields also appear exquisitely sensitive to talk of tapering QE, I wonder whether Osborne’s “steady rise in bond yields” could happen without a change in the fundamental outlook for the economy?

    • July 17, 2013 at 14:10

      Prateek – yes, very good point. I think it’s undoubtedly true that movement of gilt yields is not solely a reflection of expectations for the UK economy. So perhaps it is better to say only that gilt yields send us confusing messages and politicians shouldn’t take credit for them!

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