Private and Government Bond Rates

So there is need for two types of adjustments in gilt-edged market; firstly, the long end of the spectrum is to be made more attractive, consistent with the expected rate of inflation. Secondly, the yields on government securities should be attractive vis-a-vis yields on private securities, which is reflected in gaps and reverse gaps. A gap is positive if the there is risk aversion in the economy which has to be corrected.

These adjustments were made over the last decade of the eighties with result that the gap between them is narrower at around 2 percentage points. The coupon rates offered in the gilt-edged market during the last few years have been jacked up to bring them to realistic levels of the expected rate of inflation. Besides, this has improved the earnings of banks and made them more attractive to banks and non- bank investors.