CREDIT MARKETS & INFLATION EXPECTATIONS. A BLEAK OUTLOOK FROM DUBLIN
. John Murray: "Dublin to cut public sector pay", Financial Times

When people discuss the impact of inflation expectations on long-term interest rates, they usually have in mind an increase in inflation expectations. But take a look at the news from Dublin. According to John Murray:

Irish public sector workers face an average 7.5 per cent pay cut under government plans for a pensions levy to help raise the €2bn targeted this year to reduce the large budget deficit. Brian Cowen, the prime minister, outlined the austerity package to parliament in the first step of a five-year plan to reduce the budget deficit by a cumulative €16.5bn ($21.3bn, £14.8bn).

With news like these, it's no wonder interest rates on government bonds are so low. See also George Trefgarne: "Chancellor is pulling the Bank's strings", The Telegraph.