The Chancellor George Osborne will have been delighted to pick up the Financial Times this morning. As the Eurozone implodes, the FT’s splash was headlined:
Gilt yields fall as UK becomes safe haven
“Safe haven” is a line that the Chancellor and his supporters in the right-wing press have been spinning for several months now, arguing that the fall in UK government borrowing costs – gilt yields – to historic lows is a vindication of the coalition’s austerity agenda.
The inconvenient truth is that low gilt yields are a reflection of economic weakness, not strength. Investors are pricing for a double-dip recession – or as the Telegraph’s in-house deficit hawk Jeremy Warner conceded back in August:
Gilt yields are signalling a depression
As the FT story itself goes on to reveal:
[L]ow returns reflect expectations that the Bank of England will keep interest rates exceptionally low for the foreseeable future given the UK’s extremely weak economic prospects.
The paper also cites an important, if under-reported, study by former Cabinet Office chief economist Jonathan Portes:
Examining the links between stock market performance and gilt yields, Jonathan Portes, director of the National Institute of Economic and Social Research, has found a strong correlation between lower gilt yields and greater investor concerns about economic prospects.
Over to you, Gideon…