Random Thoughts

UK capital markets defy the usual assumptions. it is very well known in financial literature that more often than not, the yield curve shows an upward trend. this is because in the markets there are more short term investors than there are long term ones, and so they demand an extra premium for holding bonds for the long term. this premium is also called the "liquidity premium".

however, the UK market is showing the exactly opposite trend. due to rising population of old people, the pension funds are holding a clout in the market which is unprecedented. since these funds have long term liabilities (in layman's terms, they have to pay people till they die, and thanks to the modern medical marvels most people today die when they are very old. so the pension funds have to estimate payments that they will have to make 30, and even 40 years from now), they don't demand any liquitiy premium for holding bonds. instead, due to the high demand from them, the long term yields on government gilts are actually falling, which is giving rise to a falling yield curve.

it has always been very hard to understand London, be it the capital market, or the people who live there. and this is what I love, perhaps. :)