The bond vigilantes are back — and that’s no bad thing
Blaming Rachel Reeves’s budget for the rise in gilt yields does not fit the facts, but stronger productivity growth is vital as bond traders dog the government. David Smith : The Sunday Times 12th January 2025 The big economics story has been the increase in the cost of government borrowing, the yields on UK government bonds, or gilts. Ten-year gilt yields have risen to more than 4.8 per cent, their highest since early 2008, while 30-year yields have risen to 5.4 per cent, their highest since 1998. At the same time, the pound has weakened against a stronger dollar. Comparisons with the autumn of 2022, when Liz Truss was prime minister and there was a loss of control of fiscal policy, are silly. Although gilt yields are higher now than then, they are close to the level of short-term official interest rates, the 4.75 per cent Bank rate. We know what is driving the recent increase in gilt yields. It was thought that the biggest risk to the UK economy from Donald Trump’s election victory would be the direct effect of his decision to impose tariffs on imports from trading partners. Now it looks as though a bigger challenge is the indirect effect on the cost of government borrowing. The chancellor’s October 30 budget has a lot to answer for, but blaming it for the latest rise in gilt yields does not fit the facts. Market worries about the impact of the Trump presidency on US inflation have started to kick in, and UK yields have risen in lockstep with those in America. The other factor is the fear that faced with sticky inflation, the Bank of England, like the US Federal Reserve, will be slower to reduce interest rates. The sharp rise in UK government debt in recent years, from under £800 billion in 2009 to £2.8 trillion now occurred at a time of very low gilt yields. Quantitative easing (QE) by the Bank helped keep them low. Debt interest, which averaged less than £40 billion a year in the 2010s was not a worry. Now bond yields are up, QE has been replaced by quantitative tightening, pushing those gilts back into the market. Bond vigilantes are snapping at the heels of governments. Even before the latest rise in gilt yields, the OBR expected debt interest payments to average £112 billion a year between now and the end of the decade. Stronger productivity growth would transform the outlook for the public finances. Meeting the fiscal rules would be a breeze, not a close-run thing, and the relentless rise in debt, could be brought under control. https://www.thetimes.com/business-money/economics/article/the-bond-vigilantes-are-back-and-thats-no-bad-thing-cmcw2c20t [Bill Clinton’s chief strategist James Carville famously said: “If there was reincarnation, I would want to come back as the bond market. You can intimidate everybody.” The vigilantes are sending a warning to the incoming Trump administration and the Reeves Treasury at the same time. It’s a go slow on buying, not yet an outright strike].
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