What matters in global markets: government deficits and bond markets

What matters in global markets: government deficits and bond markets
Document type
Report
Corporate author(s)
Towers Watson
Publisher
Towers Watson
Date of publication
24 May 2010
Series
Long-term statistics
Subject(s)
Trends: economic, social and technology trends affecting business
Collection
Business and management
Material type
Reports

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This report analyses the potential implications of the deterioration in government finances on investments in government bonds in the UK. This is a diverse topic and debt can have an impact on bond yields under a variety of scenarios. The analysis suggests that there are no obvious significant risks to government bonds in the central scenario. First, the risk of outright default of a major developed economy to be low given the ability to raise tax revenue and cut spending. Second, while the risk of downgrade is very high, especially for the UK, the impact on yields is likely to be minimal and may be already priced into current levels. However, the study emphasises various risks to this benign outlook, in particular surrounding fiscal and monetary policy decisions and their impact on exchange rates and inflation.

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