The bond market ‘police’ is back as investors control spending plans

Bond markets have entered a hostile period with governments in major economies such as the UK, France and the US as investors sell sovereign debt amid a deluge of debt, fund managers said.

In October, the UK’s tight borrowing budget triggered a sell-off in the gilt market, pushing the 10-year yield up. The highest level since 2008 And the highest 30-year interest costs this century.

France’s political crisis has pushed its borrowing costs higher than Greece’s as it struggles to budget for austerity measures. In the US, the Treasury market has been hit by fears that President-elect Donald Trump will borrow freely and cut taxes.

Driving these activities are government bond investors who play the role of enforcing fiscal discipline by demanding higher yields when government finances deteriorate.

“There is a resurgence in bond market activity,” said Robert Dishner, senior portfolio manager at Neuberger Berman.

“The markets are not used to this as they usually are in the corporate space,” he said, adding that pressure has shifted to sovereign debt.

Massive lending through the Covid pandemic has helped to significantly increase debt burdens in major economies such as the UK, France and the US. Net government debt will exceed 100 percent of GDP in the US and France this year, and will be close to that level in the UK, according to IMF forecasts.

Annual deficits are widening and will exceed 7 percent of U.S. GDP by 2025, analysts say. The French government has targeted a deficit of 5-5.5 percent of GDP for 2025.

The UK Labor government’s decision in October added to investor unease compared to earlier plans. According to official forecasts, public debt will fall to 4.5 percent of GDP in the fiscal year and 3.6 percent next year.

Investors demand higher yield on UK debt compared to German 10-year bonds get up It was up 2.3 percentage points last month, the biggest rise since 1990 and the highest since former prime minister Liz Truss’ 2022 “mini” budget.

France was able to expand with Germany. has risen It reached its highest level since the eurozone debt crisis, reaching 0.9 percentage points in November. Ten-year U.S. Treasury yields rose to about 4.7 percent from 3.6 percent in September.

Those moves come as central banks begin to cut interest rates — traditionally the main driver of bond yields — as inflation fades after the pandemic. Selling is concentrated in long-term debt, which is highly sensitive to the junior rate.

“I like to think that the government bond market has grown in class,” said April LaRousse, head of investment specialists at Insight Investments.

Bond investors often provide a “low voice in the background” of policymaking, but events in the UK and France have shown how the pressure is starting to increase, LaRusse added. “They’re going to tell governments[when]they’re going to push things too far.”

Changes in U.S. fiscal policy in the 1990s have drawn comparisons to the so-called “bond cautious,” a group of investors who forced yields higher but have been dormant lately. While tensions aren’t at those levels, fund managers say central bank purchases have been a major force in bond markets since the global financial crisis, a period of low rates and quantitative easing.

“Extremely high levels of debt” in countries such as the UK and France have encouraged investors to take on their former role as “police to stimulate responsible fiscal policy”, said economist Peder Beck-Fries, who manages $2tn at the Peder Beck-Fries Fund Company. .

You don’t need a big shock in fiscal policy or political news to create a lot (a lot) of volatility in the markets, he added.

As China sells off some foreign debt, and central banks shrink their balance sheets, “we no longer have a bond buyer that is price sensitive,” said Niall O’Sullivan, chief executive of Mercer Global Solutions. As a result, “(bond markets) are more of a regulatory force,” he said.

Many governments are borrowing heavily to boost growth, and plans to tackle fiscal deficits have failed to reassure markets.

Bank for International Settlements warned In December, rising debt levels were “one of the biggest, if not the biggest, risk to the global economy”, and higher borrowing costs were a sign that markets were realizing they were taking on more debt.

Chancellor Rachel Reeves warned that investors in the UK would breach her new fiscal rules when official forecasts were released in March as borrowing costs rose sharply. And Moody’s downgraded France’s credit rating in December, warning of a “negative feedback loop between high deficits, high debt burdens and high financing costs.”

Bond-holding activity has begun to weigh on the $26tn US government bond market, where the dollar’s level as the global reserve currency means many investors around the world have no choice but to buy Treasuries.

PIMCO he said. Last month, he was reducing exposure to long-dated U.S. debt due to sustainability concerns, saying he felt a gradual increase in bond yields.

“There is no organized vigilance team ready to act on specific debt thresholds; changes in investor behavior occur mostly at a margin and over time,” the asset manager said.

But Trump’s tax cut promises, if he delivers on them in full, could lead to such a turnaround, some investors say.

“If the Republicans try to include everything that was discussed during the campaign, without paying for the majority, it will increase the audience of bond vigilantes who will return to me,” said Sonal Desai, CIO at property manager Franklin Templeton. .