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You're missing something important. Sovereign credit ratings are very misleading when the sovereign can print its own money (like the UK). I would argue that every country is AAA in debt of its home currency, since its central bank can just print money to pay off the debts. There are examples when a sovereign chooses to default on its own currency, ...


Per @dm63, these yield curves are basically smoothed curves that best fit the prices/yields of bonds traded in the secondary market. However, they reflect much more than market expectations. Refer to Deriving Interest Rates for details.


Yes, yield curves are a pictorial representation of the current secondary market yields of government securities (gilts, in the UK). These market yields are determined largely by expectations about what the central bank will do to short term rates over time.


This is the trade that made LTCM famous. Italian yields were higher than German yields. The prediction was that yields of Italian bonds would become equal to those of German bunds. Since prices move inversely to yields the trade is to be Long Italian Bonds and Short Bunds. You could skip the shorting of bunds (and only be long Italian bonds) but: (1) That ...

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