What Government Bond Yield Curves Represent
Summary
The document asks whether a central bank's published government yield curve is a forecast of future policy rates or a curve derived from bond market prices. The context is the fall and steepening of UK gilt yields after the Brexit vote, which the question associates with shifting expectations about Bank of England policy and economic growth. The replies describe published curves as smoothed fits to yields or prices observed in the secondary market, rather than a central bank's independent policy forecast.
The replies distinguish the curve's construction from what its shape may reflect. Market prices incorporate expectations about future short-term rates, but the accepted response cautions that the curve conveys more than those expectations. The brief answers do not explain the fitting procedure or enumerate other influences, so they provide a useful conceptual distinction rather than a complete interpretation framework. The Brexit example is the questioner's motivation, not an empirical analysis of how much each factor contributed to the observed move.
Key ideas
- Published government curves are described as smoothed fits to secondary-market bond prices or yields.
- A central bank's curve is not necessarily an official forecast of its own future policy decisions.
- Market expectations about future short-term rates influence government bond yields across maturities.
- A yield curve reflects more than policy expectations, though the brief answers do not detail those other influences.
- The Brexit-related gilt move motivates the question but is not analyzed empirically in the responses.
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Full text
# Do yield curves only show market expectations, or is there more to them? # Do yield curves only show market expectations, or is there more to them? I am hoping to understand 'Brexit' impact on UK yield curves. Specifically, government liability yield curves (so yields based on UK government bonds - Gilts): The Background On 24th of June - the day markets found out Britain is leaving the EU, rates for the whole term structure dropped. The curve also steepened, with a bigger drop at the short end. It seems that Monetary policy expectations are that the Bank of England might look past inflation (driven by depreciation of the pound / more expensive imports), and tackle economic growth by maintaining low interest rates. If the markets are expecting the BoE to reduce their already low base rate, that might explain the drop in short term rates. The expectation of a prolonged period of economic uncertainty might explain why we see the drop at longer tenors also. The Question I've seen some publications on how the BoE constructs their curves (direction to a bulletin found in one of the attachments here). But without getting into the maths too much, wanted to get one thing clear: Are yield curves published by central banks, solely a reflection of market expectations, based on fixed income prices in secondary markets? Or, does the government incorporate some of their own 'view' in published curves? A view perhaps reflecting the central banks ideas on future monetary policy? As I understand it - curves, published by central banks are built from publicly available bond market information and do not include any form of forecast or estimate form the central bank. Is this correct? Example of curves im talking about here ## Answer by Helin (score 1, accepted) https://quant.stackexchange.com/a/27844 Per @dm63, these yield curves are basically smoothed curves that best fit the prices/yields of bonds traded in the secondary market. However, they reflect much more than market expectations. Refer to Deriving Interest Rates for details. ## Answer by dm63 (score 1) https://quant.stackexchange.com/a/27843 Yes, yield curves are a pictorial representation of the current secondary market yields of government securities (gilts, in the UK). These market yields are determined largely by expectations about what the central bank will do to short term rates over time.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.