BM Talks Bonds Part 1: For Your Yields Only

Let's, let's do a bit more on these interest rates, right? So, um-

Mm

... you touched on that.

You talked about a yield curve.

Let's do the yield curve first, and then we'll go into what are the other rates that are out there.

Um, what is a yield curve? What does that mean?

The technical term they would give you, uh, in, is the price of time.

So it's effectively if I'm lending money to you overnight, that's almost certainly a lower, uh, interest rate than if I was agreeing to lend you money over 10 years.

Because over 10 years, I have to have taken into account what inflation is, your dynamics as a, a sort of a creditor, so your ability to pay me back.

And as we get further away, generally the yield curve slopes upwards most of the time because you're lending money to people for a longer period of time with a greater range of uncertainty, and that's what basically comprises the yield curve.

curve.Right.

Exactly.

Now, the, uh, Bank of England, we-

Mm-hmm

... will all be hearing regularly when it meets, it has its meetings, and it can change the interest rate.

Now, what interest rate is it changing? Because, and let's keep this simple, because there have been periods where actually the Bank of England has been involved in a bit more than its, than the bank rate.

But let's just say, what is bank rate?

So that's effectively the overnight rate that you would borrow money on, and the Bank of England acts like a giant gravitational force, so it influences bond prices mainly up to the two-year point.

Then its influence starts to fade.

And again, if you think of it conceptually, if you're lending money on 10 years' time, 30 years' time, or in the case of the UK, there's even 50-year debt, what the Bank of England's paying you today has some bearing, but you're really having a longer term view on the economy.

So, um, the Bank of England, actually, Ben, you were, you, if I may say, you have worked at actual banks.

You're now, um, in a wealth management firm, but in your past you have worked in, in banks and all these different banks in the world, um, well, the ones operating in the UK in sterling anyway, they can put the pounds on deposit with the Bank of England overnight.

It's not just a group of nine people that meet and decide what the interest rate should be.

Um, there is actual cash balances that move around.

The Bank of England and the banking system is moving around vast amounts of money, well, minute by minute, but day by day, right?