Unlock Editor’s Digest for free
FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
Bond’s vigilantes can smell blood. Buoyed by the turmoil in the UK government bond market, the undead sheriffs of global finance are cracking open the coffin: a crisis is approaching, urgent action is needed, and a massive debt settlement is about to begin. is warning. Bond prices are on the brink of a major decline and you need to roll your head.
We hear excited voices saying that Rachel Reeves, the British Prime Minister, should have resigned, that she should have canceled her trip to China, that the Bank of England should have done something about this sudden evaporation of investor confidence. I am telling you. This is all nonsense. Bond market discipline is real. Just ask Liz Truss. The big risk is that, at some point, investors will end up gorging themselves on the huge amount of bonds they’re being asked to digest. They will either refuse to continue purchasing or demand punitive interest rates, locking governments into painful debt service costs for decades.
This hinges on the idea that world government borrowing is getting out of hand. There is some truth to this. Last year, the IMF estimated that global debt levels would reach about $100 trillion, which is a large number no matter how you look at it. “Countries should face debt risks now,” he said. Frankly, this means either drastically cutting spending or relying on inflation to reduce debt. Option 1 is costly. Option 2 is what keeps bond investors up at night.
Of course, it’s not just British bond prices that are under pressure. Perhaps more worryingly, U.S. yields have also been rising relentlessly in recent months, even as the Federal Reserve has cut interest rates. This is very strange. As Apollo chief economist Torsten Slok pointed out this month, when interest rates fall, long-term bond yields generally fall.
This time, the 10-year US Treasury yield has risen by about 1 percentage point since the Fed started chopping. “This is highly unusual,” he wrote. “Is it a fiscal concern? Is there less demand from abroad? Or was the Fed rate cut not justified? The market is telling us something, and for investors It’s very important to have a view on why long-term interest rates are rising when the Fed is cutting rates.
Investors can think of various reasons for this, one of which is financial concerns. Perhaps this is actually the beginning of a major backlash from asset managers, and a major conflict between governments and markets has already begun. But the truth is probably more mundane.
Ian Steely, international chief investment officer for fixed income at JPMorgan Asset Management, is among those who are not convinced that the situation is as unusual as it seems. The gradual rise in U.S. yields since the start of interest rate cuts in September is “no doubt a significant move,” he said. But he also noted that yields had been falling well before the Fed’s policy shift.
That in itself is a problem. The typically robust government bond market has been prone to overreaction lately, which could lead to an unpleasant snapback. But also, as the Fed acknowledged in December, the facts have changed. The economy is still doing well, and Donald Trump’s economic policies reek of inflation. Investors are busy writing down rate cuts for 2025, and markets are moving accordingly.
For the UK, the main victim of the bond vigilante wrath, it remains very difficult to argue that anything meaningful has changed. “Can you really blame Rachel Reeves?” the hedge fund group’s Mann asked this week. “This event does not appear to be unique to the UK; gold and government bond yields have moved almost in tandem. . . . Our lesson here is to be careful about what the media says.” (I choose to exclude myself from that burn.)
In addition to this, the New Year’s rush of bonds circulating in the market is on an unprecedented scale. Investors said the figure was slightly exaggerated as borrowers were eager to avoid a one-day shutdown of U.S. markets last week following the death of former President Jimmy Carter. The butterfly effect is activated.
All of this has led bond bashers to push the door open, especially in the UK. Andrew Chorlton, chief investment officer for fixed income at M&G Investments, said at the event that hedge funds looking to make a quick buck appeared to have played a big role in determining how far government bonds could be pushed. said. Central banks are also withdrawing support for bond markets. Quantitative easing with ultra-low interest rates is over. Now that that safety net is gone, what we see is the more “real” price of government bonds.
For those who want to bash bonds and politicians, it’s easy now. However, bond market fluctuations are not inherently equal. I may be proven wrong, but this feels less like rebellion and more like retaliation.
katie.martin@ft.com
