As we explained at the time of the forward guidance announcement, a rise in the yields on long term bonds is consistent with our commitment to price stability and supporting the recovery. Market interest rates at terms of 2–5 years have also risen recently. The date at which the markets expect the first increase in Bank Rate has moved in from the end of 2015 to mid2015. One possible explanation is that markets think that unemployment will come down to 7% more quickly than we do. Since the aim of our policy is to secure recovery as quickly as possible, that would be welcome. But policy is built not on hope, but on expectation. And we estimate there is only a 1 in 3 chance of unemployment coming down that quickly (Chart 1).4 Furthermore, thinking unemployment will come down faster than we expect isn’t enough to believe interest rates will rise soon. As I said earlier, the 7% threshold is a staging post to assess the economy. Nobody should assume that it is a trigger for raising rates. Another possible explanation is that the increase in shorter-term yields, like the move in long yields, reflects changing expectations of US monetary policy. But the US recovery is much further advanced than that in the UK.
So we also have to take a close interest in developments in overseas and international financial markets. The international bond market is of course a key example. We try to analyse the information in market prices and other data. But the real understanding of the latest developments comes from talking to market participants. Credit risk transfer markets This is particularly important when it comes to financial innovation. In recent years, instruments and markets for the transfer of credit risk have been a particular focus of change. New ways have been found to securitise cashflows which could not previously be traded, to unbundle the credit risk from loans and bonds, and to re-bundle credit exposures in different ways to create securities with different pay-offs. BIS Review 15/2001  1  The distinction between a loan and a bond is becoming increasingly blurred. Individual loans are sold into the secondary loan market, although some companies remain reluctant to see their debt traded in this way. And portfolios of loans and other cash flows, ranging from mortgage payments to recording royalties, are sold to special purpose vehicles for securitisation into tranches with different risk characteristics and maturities, from AAA to junk, and from commercial paper to long-term bonds. Portfolios of bonds are also repackaged, sliced and diced in a similar way to create collateralised bond obligations. The new area of growth at present, however, is not in these sales of assets to remove them from the balance sheet.