This is a research article prepared mainly by Oliver Page and J. P. Burman.
The present formulation of the yield curve was introduced in the December 1972 issue of the Bulletin and, with one or two minor modifications, it performed well over the following two years. At the end of January 1975, however, a dip appeared in the yield curve between four and six years and has subsequently persisted: the curve for 20th March 1975, when the dip was at its greatest, is shown in Chart A. The dip does not appear to be reflected in the yields of actual gilt-edged stocks; in fact, market views are that it would not be possible for the Government to take advantage of the dip by issuing stocks in that maturity band at the yields indicated by the curve. Further investigation has revealed the causes of the dip, and the modification described below has accordingly been made to the method of fitting: this eliminates the dip and should help to prevent similar problems from recurring. However, it is always possible that other anomalies may arise in the future, and the Bank will be prepared to make further modifications if these should prove necessary.
Yield curves for gilt-edged stocks - a further modification