BOND YIELDS

The past year has been a steady one for rich countries' government-bond markets, with yields hovering a percentage point or so above the lows of autumn 1998 (in America and Japan) and early 1999 (in Britain and Germany). The principal influence on yields has been changes in the markets' views on inflation and, in the United States, on the economy's ability to maintain its exuberant economic growth without unduly pushing up prices. A big change over the past several years has been the closing of the gap between British and German bond yields. In early 1996 British yields were still about 1.5 percentage points higher than German ones. Now the two are virtually identical; for much of this year the yield on British ten-year bonds has actually been below its German counterpart. The most striking feature of our chart, though, is the low level of Japanese yields, despite that country's enormous public-sector debt. In 1998, yields dipped below 1%; even today, they still barely scrape above 2%.