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Roula Khalaf, Editor of the FT, selects her favorite stories in this weekly newspaper.
Bond vigilantes can smell blood. Bolstered by the shake-up in the UK government bond market, the world’s idle sheriffs of finance are opening their boxes to warn that a crisis is coming, urgent action is needed and soon the big debts will begin to count. Bonds are on the verge of a major price drop and the headlines are bound to slide.
Good words tell us that UK Chancellor Rachel Reeves should resign, that she should have canceled her trip to China, that the Bank of England should do something to deal with this sudden change in investor confidence. This is all nonsense. Debt market discipline is a reality. Just ask Liz Truss. The biggest risk is that at some point, investors will hold too much of the bonds they are being asked to dig. They may refuse to keep buying or demand penalty fees, binding governments with decades of painful debt servicing costs.
This is based on the assumption that global government borrowing is out of control. There is a grain of truth in this. The IMF calculated last year that global debt levels stand at around $100tn – a huge figure by any measure. It said: “Countries must face credit risks now.” Basically, this means cutting back on spending or relying on inflation to reduce debt. The first option does not have its own costs. The second option is what keeps bond investors up at night.
Of course, it’s not just UK bond prices that are under pressure. More surprisingly, perhaps, US yields have also advanced significantly in recent months even as the Federal Reserve has lowered interest rates. This is very surprising. Long-term bond yields typically fall when interest rates fall, as Apollo chief economist Torsten Slok said this month.
This time, US 10-year yields have risen by a percentage point since the Fed began cutting. He wrote: “This is very unusual. “Is it financial worries? Is it weak import demand? Or maybe the Fed’s tapering was not justified? The market is telling us something, and it is very important for investors to have a view of whether it is why long rates are rising while the Fed is cutting.”
Traders can paint many reasons for this, and one of them is financial problems. Perhaps this is the beginning of a big move from financial managers and a big conflict between governments and markets has begun. However, the truth may be more prosaic.
Iain Stealey, chief international financial officer for fixed income JPMorgan Asset Management, is one of those who do not believe that this situation is not as common as it seems. The sharp rise in US output since the cuts started in September is “a big move, no question”, he said. But he also pointed out that yields were deep long before the Fed’s pivot.
That’s problematic in itself – the government bond market tends to get caught in an over-recent trend, which can lead to unpleasant snapbacks. But again, the facts have changed, as the Fed acknowledged in December. The economy is in good shape and Donald Trump’s economic policies are smelling good. Buyers are busy writing down the discounts they booked in 2025 and the market is doing well.
For the UK, which is said to be the main victim of bond vigilante ire, it is still difficult to argue that anything meaningful has changed. “Can we really blame Rachel Reeves?” ask hedge fund group Man this week. “The current situation doesn’t seem to be talking about the UK at all – gilt and Treasury yields are moving very much in line with each other . . . Our lesson here is to be careful what the media says.” (I’ll take freedom from that burning.)
Adding to the mix, the rush of new year bonds hitting the market has been unusually large. Investors said that was overstated last week when lenders were determined to avoid a US stock market shutdown one day to mark the death of former President Jimmy Carter. A working butterfly.
All of this has left bond bashers pushing for an open door, particularly in the UK. Andrew Chorlton, chief investment officer of M&G Investments, said at one event that hedge funds “looking to make a quick buck” were playing a big role in their push for gilts. how low. Central banks have also scaled back their support for bond markets. The reduction in volume accompanied by extremely low profits is over. When that safety net is gone, what you see is the “real” price for government bonds.
It’s easy for those who want to destroy bonds, or politicians, at the moment. But bond market wobbles are not born equal. I may be proven wrong, but this sounds like austerity, not rebellion.
