FinanceBAM News

John Stepek of MSN Money wrote on interesting article on June 20, 2007, that brought to light the fact that the government bond market is making big news. This is unusual for a section of news that hardly anyone ever sees.

The yield on a 10-year gilt (UK government bond) hit a seven-year-high of 5.5% last week while the yield on a 10-year Treasury (US government bond) was also on the rise.

This is important as the yield for government bonds is the foundation for all asset values. If you can receive because if you can get a 5.5% on a government bond which is virtually risk-free than you need to be able to get a better return on anything riskier.

This means that yields on everything have to rise. And for yields to rise, prices need to fall.

This is happening for a few reasons, one of them being higher interest rates. People are realizing that interest rates are on the rise and still have yet to hit their highest. This is due to the fact that a US slowdown has yet to happen so people are no longer relying on the US Federal Reserve to cut interest rates.

The largest reason though is due to inflation. With the rising costs of living inflation is creeping up in every part of the world.

The trouble with rising rates is that with rates rising, consumers have less to spend on everything else. Because the UK owes more than 1.3 trillion collectively, consumers are more vulnerable to rising rates than ever.

Further rate increase will also slow down the housing market as well as consumers as they realize they can no longer rely on soaring house prices to fund their retirement. This means that they will need to start saving – and stop spending.