Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Open the editor’s digest for free
FT editor Rula Khalaf picks her favorite stories in this weekly newsletter.
Being the ugliest horse in the glue factory doesn’t help when bond markets are sticky. Sadly, that is the role it now plays in the UK.
It’s been a terrible start to the year in global bonds, but analysts and professional investors have told us to expect a sharper fit for 2025. From the U.S. to Japan, and everywhere in between, rich-market government bond prices have fallen, driving yields lower and borrowing costs higher — a bane for countries that have gone hand-in-hand with investors in search of funding.
However, the United Kingdom has a more unhappy history of suffering than most, and still, in recent memory, in the 2022 gilts crisis, alarm bells are ringing. A surprising new wrinkle emerged this week, when Liz Truss, the prime minister of that short-lived amnesty, said through her lawyers that it was unfair to assume the economy had collapsed during that time. This is a curious move, and reflects poor familiarity with Streisand score.
Anyway, the pressing question is whether we are at a new beginning. Gilts A fire. In my mind, the answer is short. The longer answer: it’s out of the hands of UK policymakers anyway.
To be clear, this week’s riots are serious events. Not all, but many investors have been chilling on UK debt for some time amid signs of persistent inflation making it difficult for the Bank of England to cut interest rates. Ten-year yields have risen by about half a percent since the new government budget in late October. That represents a big drop in prices and is a fair chunk of the bond’s land to push long-term yields to their highest level since 1998, including some modest drops in this week’s opening days.
More worrying, perhaps, is that sterling has also taken a knock, not just as investors readjust their views on what the BoE will do next and when, but more broadly the risk away from the UK. (Even Greg’s share price has taken a nosedive, and if you can’t bet Brits are getting pennies for steak bakes and sage rolls, there’s something wrong.
Declaring the gilts shake-up as a new crisis suits the political agenda of some observers. But context is important here. Overall, shares are up, not down, so far this young year, reflecting the tight relationship between the FTSE 100 index, buoyed by overseas earnings and the weak pound. It wasn’t the same in 2022 when the FTSE smoked. Yes, a half-point increase in 10-year gilt yields is a lot since the budget. But in 2022, they jumped more than three days. The two things are not just competing. And the pound is weak, sure, but so is the euro, the yen, and everything else besides the mighty dollar.
Here is the key. With the U.S. economy already outpacing other developed countries and inflation running higher than expected, the real story is the rise in global bond yields. In the middle of December The Federal Reserve pointed out. It won’t be as quick to cut rates as investors previously thought. A few weeks ago, markets reflected expectations that the Fed would cut interest rates several times in the opening months of this year. Now we’re looking at a chop in the summer, maybe, and maybe another one later. Friday’s surprisingly strong US jobs data added further fuel here.
U.S. bond yields, which exert a heavy pull on the rest of the world’s debt markets, are also pulling higher. Benchmark U.S. 10-year yields have gained nearly 0.2 percentage points so far this year, pushing the rest of the market out of recession. Britain is in trouble because weak gilts are putting Chancellor Rachel Reeves in a difficult position to cut spending or end taxes. But production in budget-tight Germany has risen to the same level as the UK without much fanfare.
Beyond the sluggish U.S. economic performance, the global pressure on bonds is increasing as Nobel Prize-winning economist Paul Krugman noted this week that “Insanity premium” on bond yields in the US.
“A long-term rise in rates like the 10-year Treasury rate could reflect a nagging and frightening doubt that Donald Trump really believes his crazy talk about economic policy and will act on those beliefs,” Krugman wrote in his blog. US inflation is on the rise again, signaling higher trade tariffs, tax cuts and mass deportations.
So what stops decay? My feeling stops itself. U.S. bonds have not slipped in value since they began to represent an unbeatable bargain for investors. This would be possible if 10-year yields were close to 5 percent and now near 4.8. The same goes for the UK, for all its problems, it has defaulted on its debt. Big round numbers, in this case five, have a strong tendency to hammer that message home.
But the grim scenes on bond trading floors this week are a reminder, for Reeves and the rest of us, that America is driving its car to rich markets. We are only passengers and must hope that he is guided carefully.
