Is the three-and-a-half decade long bull market in the highest-rated government debt over? If so, would that be a good thing or a bad one? The answer to the first question is that it seems quite likely that the yield of 0.08 per cent (8 basis points) recorded on the 10-year Bund in April was a low point. The answer to the second question is that it would be a good thing: it would suggest confidence that the threats of deflation and eurozone disintegration are fading. At the same time, this bounce does not mean that a rapid rise in yields to what used to be normal levels is on the way. We should want to see yields rise, but modestly. This is also what we should expect.

Yields on 10-year bonds have behaved like the grand old Duke of York in the nursery rhyme: they marched right up to the top of the hill and then marched right down again. Yields on government bonds of the big advanced economies peaked in the early 1980s: Japan’s peak was near 10 per cent, Germany’s 11 per cent and those of the US and UK 15 per cent and 16 per cent. Then came a decline. Japan’s rates had fallen below 2 per cent by the late 1990s. Yields in the other three countries were between 3 and 6 per cent before the crisis, only to fall far lower still.

Theory suggests that long-term interest rates should be a weighted average of expected short-term interest rates, plus a “term premium”, as Ben Bernanke, former chairman of the Federal Reserve, argues in a recent blog. The premium should normally be positive, even in the absence of default risk. Longer-term securities are riskier than short-term ones, because their prices are volatile. Expected short-term rates should be determined by expected real interest rates and expected inflation. Again, expected domestic real interest rates should be determined by expected global real interest rates and expected changes in real exchange rates. Expected global real interest rates should, in turn, be determined by the expected balance of saving and investment. Finally, special factors, such as risk-aversion — at the limit, outright panic — and purchases by foreign governments and central banks, will also affect the prices of long-term bonds.