When the bond market becomes volatile, being the ugliest horse in the glue factory doesn’t help. Sadly, that is the role the UK currently plays.
Global bond markets have had a tough start to the year, once again defying what smart analysts and professional investors told us they expected for 2025. From the United States to Japan and just about everywhere in between, governments in developed countries are seeing bond prices fall and yields and borrowing costs rise, hurting countries as they compete with investors seeking capital.
However, the UK has the unfortunate distinction of suffering more than other countries, and given that memories of the 2022 Bank of England crisis are still recent, alarm bells are ringing. This week, a strange new wrinkle appeared in the story. The mercifully short-lived Prime Minister, Liz Truss, declared through her lawyer that it was unfair to suggest that she had crashed the economy at the time. This is an interesting move and reflects a lack of knowledge about the Streisand effect.
In any case, the pressing question is whether we are at the beginning of a new golden bonfire. The simple answer in my opinion is “no”. The longer answer is that “it’s largely out of the hands of British policymakers anyway.”
To be clear, this week’s gold market crash is a serious episode. Many, but not all, investors have been wary of investing in British government bonds for some time, fearing signs of lingering inflation that will make it harder for the Bank of England to continue cutting interest rates. Since the new administration’s budget was passed at the end of October, the yield on 10-year bonds has increased by about 0.5 percentage point. This represents a significant portion of fixed income land and represents a significant decline in prices, including a significant decline earlier this week, pushing long-term yields to their highest levels since 1998. There is.
Perhaps even more worryingly, the pound has also fallen, reflecting not only investors recalibrating their views on what and when the central bank will do next, but also more broadly the risks to the UK. It suggests that you are trying to move away from. (If even the Gregg’s share price has crashed and you can’t bet that Brits will find the money to buy grilled steaks and sausage rolls, then something is really wrong.)
Some observers believe that declaring the weeding out of the money cadres a new crisis serves political purposes. But context is important here. In general, shares have risen, not fallen, so far in this young year, reflecting the close relationship between the overseas earnings-filled FTSE 100 index and the weaker pound. The same was not the case in 2022, when the FTSE went up in smoke. Yes, the 0.5 point increase in 10-year gold yields is a significant increase since the Budget. But in 2022, it surpassed that in three days. The two simply cannot be compared. And while the pound is certainly falling, so are the euro, the yen, and everything but the mighty dollar.
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That’s the key here. The real story is that bond yields are rising globally as the US economy continues to grow strongly ahead of other developed countries and inflation remains above target. In mid-December, the Fed indicated it would not cut rates as quickly as investors had previously thought. A few weeks ago, markets reflected expectations that the Fed would cut interest rates several times in the first few months of this year. Now we’re probably expecting a chop in the summer, and probably more after that. Friday’s surprisingly strong US jobs report added to this.
U.S. Treasury yields, which have a big pull on other bond markets around the world, are also rising. The benchmark 10-year U.S. Treasury yield has risen almost 0.2 percentage points year-to-date, which has spooked the rest of the market. Britain is in the crosshairs as the weakening of the gold medal puts Chancellor Rachel Reeves in an awkward position where she could be forced to cut spending or raise taxes. But yields in financially strapped Germany rose as much as in the UK without much fuss.
Apart from strong U.S. economic trends, global pressure on bonds stems from what Nobel Prize-winning economist Paul Krugman this week described as a “crazy premium” to U.S. bond yields.
“A rise in long-term interest rates, like the 10-year Treasury rate, is a scary, creeping threat that suggests Donald Trump actually believes the crazy things he’s saying about economic policy and will act on those beliefs.” “It may reflect suspicions,” Krugman wrote on his blog. References to high trade tariffs, tax cuts, and the possibility of mass deportations, indicating that U.S. inflation will spike again.
So what stops corruption? My sense is that it will stop automatically. Once U.S. bonds start to become an attractive bargain for investors, prices stop falling. That’s likely to happen if the 10-year bond yield approaches 5% from its current near 4.8%. The same is probably true of the UK, which, despite all its woes, has little chance of defaulting on its debts. Large round numbers, in this case 5, tend to drive home that message.
But the disturbing scenes on the bond exchanges this week are a reminder to Mr. Reeves, and to the rest of us, that the United States is wheeling into developed markets. We are just passengers and must expect to be steered carefully.
katie.martin@ft.com
