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When bond markets get sticky, it doesn’t help to be the worst horse in the glue factory. Unfortunately, that is the role that is now being played by the UK.
It’s been a terrible start to the year in global bonds, but also contrary to what leading analysts and professional investors have told us to expect for 2025. From the US to Japan, and everywhere in between , an advanced market state. Bond prices are down, yields are up and borrowing costs are up – a strong result for countries that are turning to investors for funding.
The UK, however, has the unfortunate distinction of suffering more than most, and with recent speculation about the 2022 gilts crisis, alarm bells are ringing. There was a new twist to the story this week, when short-term Prime Minister Liz Truss announced through her lawyers that it was unfair to suggest she was in recession. at that time. This is a strange process, and shows a lack of familiarity with The Streisand Effect.
However, the important question is whether we are at the beginning of a new one gilts a big fire. The short answer, in my mind, is no. The long answer is: however it is out of the hands of UK policy makers.
To be clear, the collapse of gilts this week is a serious event. Not all, but many investors have been scrambling for UK debt for some time, fearing signs of persistent inflation that will make it difficult for the Bank of England to maintain interest rates. The ten-year yield has risen by almost half a percentage point since the new government’s Budget in late October. That’s a fair share of bond land, which represents the biggest drop in prices and includes a sharp decline in the days starting this week to bring long-term yields to their highest since 1998.
More alarmingly, perhaps, sterling also took a hit, suggesting that this is not just a matter of investors refocusing on what the BoE does next and when, but from a UK-wide risk. (Even Gregg’s share price has hit a new high, and if you can’t bet on Brits getting pennies on steak cakes and sausage rolls, there’s something wrong.)
Declaring that the gilts movement is the new crisis suits the political agenda of some observers. But the context here is important. In general, stocks have been rising this little year so far, not down, reflecting the strong correlation between the FTSE 100 index, which is full of overseas earnings, and the weak pound. That was not the case in 2022, when the FTSE started smoking. Yes, the halving of 10-year gilt yields is huge since the Budget. But in 2022, they jumped more than that by three days. These two things were not compared. And the pound is weak, of course, but so is the euro, the yen, and everything but the strong dollar.
That’s the key here. The real story is the global increase in bond yields as the US economy continues to outpace other developed countries and inflation remains above target. In the middle of December, the Federal Reserve indicated it would not be as quick to cut rates as investors had previously thought. A few weeks ago, markets were reflecting expectations that the Fed would cut interest rates several times in the early months of this year. Now we’re looking at a summer chop, maybe, maybe another one later. Friday’s surprisingly strong US jobs news added fuel here.
US bond yields, which exert a huge pull on global credit markets, are also rising. U.S. 10-year yields have gained about 0.2 percent so far this year, undercutting the entire market. The UK is about to do just that because so few people are boxing councilor Rachel Reeves is in the dark where she may have to cut spending or cut taxes. But Germany’s bond yields have grown at the same rate as the UK’s without causing much controversy.
In addition to the continued performance of the US economy, global pressure on bonds comes from what Nobel Prize-winning economist Paul Krugman this week described as “crazy premium” in US bond products.
“A rise in long-term interest rates, such as the 10-year Treasury rate, may reflect nagging doubts that Donald Trump really believes the crazy things he’s talking about on economic policy and will act on those beliefs,” Krugman wrote on his blog. a reference to higher trade tariffs, tax cuts and mass layoffs pointing to a renewed increase in US inflation.
So what stops the rot? My guess is that it stands for itself. US bonds will no longer slide in price once they begin to represent an inevitable trade for investors. This could happen if 10-year yields approach 5 percent from around 4.8 now. The same is true of the UK, which for all its misfortunes, will not disappear to pay its debt. Big numbers, in these five cases, have a strong tendency to drive that message home.
But the ambiguous events surrounding the bond markets this week, for Reeves and for the rest of us, are a reminder that the US is driving the car for developed markets. We are just passengers and we have to trust that it will drive carefully.
