A cloud of mystery hangs over the government bond market. Updates on stock indices and the value of the pound against foreign currencies regularly appear in news bulletins.
Everyone enjoys the story of stocks soaring, like American AI chip makers and designers Broadcom and Nvidia.
Bond prices and yields rarely make headlines. This is partly due to the counterintuitive seesaw effect.
Falling bond prices mean higher interest rate yields, which might seem like a good thing. Higher bond prices mean lower yields.
It is generally during crises when bonuses appear. At the peak of the Greek debt crisis in 2012, yields reached 44.7 percent.
In the United States, the 10-year bond yield stands at 4.3 percent, reflecting uncertainty over an agreement between the outgoing Biden administration and Congress on an increase in public debt.
Bond Misery: Ten-year government bond yields have risen to 4.63% since Kier Starmer became Prime Minister; This is the same level as during Liz Truss’ stay and 30% more than last year.
In Britain, the gyrations of the bond market were recorded in the public domain during Liz Truss’s brief period as Prime Minister.
Unfunded tax cuts in October 2022 pushed the 10-year bond yield above 4.5 percent.
The speed of the liquidation of the UK’s public debt caused a shock to the market. Term mortgage costs skyrocketed overnight.
The most serious thing is that it was about to collapse the British pension system. Unbeknownst to most retirees, asset managers had used their holdings of UK bonds, or gold-edged shares, to boost returns by investing in a derivative product known as liability-driven investments.
Using loans to buy them could, without intervention, have brought down the entire system. Hence Labour’s accusation that the Conservatives “sunk the economy”.
Keir Starmer’s government, with its huge majority in the House of Commons, came to power promising to restore economic stability and reduce the cost of mortgage renewals.
However, despite a £40bn tax rise budget on October 30 and a change to tax rules to make it easier for the government to invest, markets are unimpressed.
Instead of falling, the yield on 10-year government bonds rises to 4.63 percent. This figure is as high as during Liz Truss’ tenure and more than 30 per cent higher than last year.
Far from inspiring global confidence in Britain’s prospects, as Chancellor Rachel Reeves promised, it has gotten worse.
There has been British discontent over the crisis led by Germany’s manufacturing sector and its political stagnation.
However, German bond yields, at 2.38 percent, are half those of the UK. Italian bonds yielding 3.52 percent are more than a percentage point lower than those in the United Kingdom.
So why the difference? Far from generating growth, Starmer’s government threatens stagnation.
Markets don’t like Rachel Reeves’ change in tax rules much. The introduction of a new measure of debt – public sector net financial liabilities – that seeks to redefine previously off-balance sheet items, such as student loans, is unconvincing.
The watchdog of public finances, the Office for Budget Responsibility, has warned of “possible fiscal illusions”. This is not a vote of confidence.
As far as consumers, homeowners and businesses are concerned, Labour’s budget sleight of hand has made life more difficult than easier.
The UK’s borrowing costs, both in the short term (due to the inflationary consequences of the budget) and in the medium term, are too high. That puts pressure on households and makes economic expansion difficult.
