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Bond’s vigilantes can smell blood. Enriched by the boom in the UK government bond market, the undead sheriffs of global finance are opening their coffins to warn that a crisis is looming, urgent action is needed and the Great Debt Countdown will soon begin. Bonds are on the brink of a major downturn and heads should be rolling.
The cheering voices tell us that Chancellor Rachel Reeves should have resigned, that she should have canceled her trip to China, that the Bank of England should have done something to deal with this sudden evaporation of investor confidence. This is all nonsense. The discipline of the bond market is real. Just ask Lease Trust. The biggest risk is that investors sometimes overestimate the huge amount of bonds they’re being asked to digest. They are unwilling to continue buying or asking for penalty rates, tying governments to decades of painful debt servicing costs.
This is related to the perception that global government borrowing is out of control. There is a grain of truth to this. IMF Calculated last year Global debt amounts to around $100tn – a huge number by any measure. “Countries need to face debt risks now,” he said. To put it bluntly, this means cutting back on hard spending or relying on inflation to reduce debt. Option one is not without cost. Option two is what keeps bond investors up at night.
Of course, it’s not just UK bond prices that are under pressure. Most alarmingly, perhaps, US yields have risen steadily in recent months even as the Federal Reserve has cut interest rates. This is very strange. Long-term bond yields generally fall when interest rates fall, Apollo chief economist Thorsten Slock noted this month.
Meanwhile, US 10-year yields have risen about a percentage point since the Fed began cutting. “This is very unusual,” he wrote. “Is it fiscal stress? Is there less demand from abroad? Or maybe the Fed cuts were wrong? The market is telling us something, and it’s important for investors to have perspective on why long rates are rising when the Fed is tapering.
Investors can cite various reasons for this, and one of them is fiscal concerns. Perhaps this is really the beginning of a big push by money managers and the great conflict between the government and the markets has already begun. But the truth is, it’s probably a lot of prose.
Ian Staley, global chief investment officer for fixed income at JPMorgan Asset Management, is among those who are not convinced that this situation is as unusual as it sounds. The sharp rise in U.S. output since the rate cuts began in September was “a big step, no question,” he said. But he also pointed out that the products had already fallen before the Fed’s testimony.
That’s problematic in itself – the typically stagnant government bond market is prone to late overreactions, which can lead to unpleasant surprises. But again, as the Fed found out in December, the facts have changed. The economy is still in good shape and Donald Trump’s economic policies reek of inflation. Investors are putting the price cuts they penciled in for 2025 into action and the market is moving accordingly.
For England, the main victim of Bond’s vigilante fury, it’s hard to argue that anything meaningful has changed. “Can we really blame Rachel Reeves?” he asked hedge fund group Man this week. “The current scene does not seem to be limited to the UK – gilt and treasury products are largely going hand in hand. . . The lesson here is that we must be careful of what the media says. (I take the liberty of recusing myself from that burn.)
Added to the mix, the New Year bond market was unusually large. That was overstated, investors said, as borrowers scrambled to avoid a one-day shutdown of U.S. markets last week following the death of former President Jimmy Carter. The butterfly effect in action.
All this while bond issuers are pushing at an open door, particularly in the UK. Andrew Chorlton, chief investment officer of fixed income at M&G Investments, said at an event that hedge funds “looking for a quick buck” seem to have played a big role in seeing how low gilts can go. Central banks have cut support for bond markets. The quantitative easing that accompanied ultra-low interest rates is over. If that safety net is gone, what you’ll see is a much more “real” price for government bonds.
It’s easy going for those who want to break bonds or politicians now. But bond market swings are uneven. I’ve been proven wrong, but that’s not rebellion, it’s protest.
