2.3.2 Gilts and the risk-free yield curve
The returns on government bonds (or ‘gilts’) perform a key function in the arena of personal and business finance. The yields provide what is known as the ‘risk-free’ yield curve – the returns you can get for investing in secure (‘default-free’) bonds for different terms to maturity.
Watch and listen to this audio-animation to learn about the ‘risk-free’ yield curve.
You can track the risk-free yield curves using this bond prices & yields tool. You’ll be reminded to check how the yields alter over the coming weeks of Managing My Investments.
Download this video clip.Video player: ou_futurelearn_mmi_vid_1042.mp4
Transcript
MARTIN UPTON
The returns to investors from UK Government bonds, or 'gilts', of the various terms to maturity collectively form a crucial component of the personal finance landscape, the riskfree yield curve. A yield curve is the line graph that joins the returns that investors get from bonds with different terms to maturity - 1 year, 2 years, 5 years, 10 years, 20 years etc. A yield curve therefore represents what is known as the term structure of interest rates. The yield curve from gilts is called risk free as they are assumed to be completely free of the risk of default by the issuer - the UK Government. The slope of the yield curve reflects market expectations about the future movement of short term interest rates like the Bank of England's Bank Rate, or official rate of interest. If the slope is sharply upwards short term rates are expected to rise in the future. If the slope is downwards the expectation is that short term rates will fall in the future.
Note though that these expectations may not be matched by what actually does happen in the future! We can also see how the risk free yield curve in the UK compares with that for the US. The latter is provided by the yields on US Government bonds called 'treasuries'.
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