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To what extent did recent UK long-term interest rate hikes reflect UK-specific factors?


The 10-year UK government bond yield increased significantly between August and October. Model-based decomposition suggests that while some of the repricing reflected global developments, UK-specific factors played a role.

10-year UK Treasury yields increased by less than 300 basis points between January and October 2022 (Chart A). Most of this movement has occurred about two-thirds of the way since August.

Chart A: Decomposition of change in UK 10-year nominal government bond yields since the start of 2022. (a) Footnotes: Bloomberg Finance LP, Tradeweb and Bank calculations. (a) Methodology based on Rigobon (2003). The orange global bar combines the shocks seen in the euro area, Japan and the US. See Raczko et al (2017) for details. Data is weekly, latest data point is weekly through October 20, 2022.

Yields in other advanced economies such as the US and Eurozone also increased during this period. Movements in these returns are typically highly correlated across countries, making it difficult to discern the impact of specific regional shocks.

One approach to addressing this problem, based on Rigobon (2003), uses changes in asset price volatility (so-called heteroscedasticity) to identify country-specific shocks. Regression analysis can be used to identify when certain regions experience particularly high or low price volatility in response to shocks, and to estimate the extent to which asset prices fluctuate between regions.

By decomposing recent movements in UK 10-year gilt yields using this model, the bank staff can attribute some of the price corrections to ripple effects from shocks in other regions (shown globally in Chart A), but factors specific to the UK. We presume this has had an impact. An increasingly important role since August.

According to market contacts, these UK factors mirrored news on risks and key cases, including rising central bank interest rates, heightened political and economic uncertainty around government fiscal announcements and market illiquidity.

Ahead of the Monetary Policy Committee meeting in November, Gilt yields have declined slightly from their peak. According to the model, this was driven by declines in UK-specific components (Chart A).

This post was written with help from Aakash Mankodi and Amarjot Sidhu.

This analysis was published in the November 2022 Monetary Policy Report.

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