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For the last 2 months both Gilt (UK government bonds) and UK commercial bond prices have increased. Many commentators have said the flight to government debt is a response to stock market uncertainty, but that doesn't explain the increase in commercial bond prices. You might expect to see bond prices increase when interest rates drop, but that isn't possible because they are already zero. What's going on?

http://fixedincomeinvestor.selftrade.co.uk/x/mem_selftrade//bondchart.html?groupid=7&id=3310&stash=9FB00F8

  • oh? The two answers so far seem to be pretty right, identifying the primary contributing factors. – user296 Aug 26 '10 at 19:06
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While commercial bonds aren't as safe as government bonds, they can still be pretty safe (and offer better yields). So, people are uncertain about the equities markets and are moving into the bond markets (both government and corporate) driving prices up and yields down.

  • Thanks for the answer. Why would commercial bonds be considered a better bet than equities? They suffered to much the same degree at the end of 2008. – Michael Burrows Aug 26 '10 at 20:21
  • @Michael - Well, almost everything suffers in a recession. In 2008, A-rated corporate bond funds lost an average of 6% as compared to 37% for the S&P 500. So while both did lose money, I wouldn't say they suffered to the same degree. – Eric Petroelje Aug 27 '10 at 13:58
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I'm just speculating, but it could be a response to the lackluster rates being offered on fixed-income investments like CDs. Maybe people are just expanding their risk limits to get some sort of meager return without so much volatility.

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