Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Unlock Editor’s Digest for free
Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
Bond vigilantes can smell blood. Unveiled by a shake-up in the UK government bond market, the immortal sheriffs of global finance are opening their coffins to warn that a crisis is looming, urgent action is needed and the great debt reckoning will soon begin. Bonds are on the verge of a heavy fall in value and heads must roll
Exasperated voices tell us that UK Chancellor Rachel Reeves should have resigned, that she should have canceled her visit to China, that the Bank of England should have done something about this sudden evaporation of investor confidence. This is all stupid. Bond market discipline is real. Just ask Liz Truss. The big risk is that at some point, investors will stumble upon the huge amount of bonds they’re asked to digest. They will either refuse to keep purchases or demand punitive rates, tying the government to decades of painful debt servicing costs.
It rests on the assumption that global government debt has gotten out of hand. There is a grain of truth in this. The IMF Counted last year That global debt level is about $100tn – a big number by any measure. “Countries should now address credit risk,” it said. Obviously, this means cutting back on hard spending or relying on inflation to shrink debts. Alternative one is not without cost. Option two is what keeps bond investors up at night.
It is certainly not just UK bond prices that are under pressure. More worryingly, perhaps, US yields have also been relentlessly higher in recent months, even after the Federal Reserve cut interest rates. This is very strange. Long-term bond yields typically fall when interest rates fall, as Torsten Slok, chief economist at Apollo, noted this month.
Meanwhile, the U.S. 10-year yield has risen about one percentage point since the Fed began cutting. “This is highly unusual,” he wrote. “Is it a financial concern? What is the demand from abroad? Or maybe the Fed cuts were not justified? The market is telling us something, and it’s important to have an investor perspective on why long rates are rising when the Fed is cutting.”
Investors can draw several reasons for this and one of them is financial concerns. Maybe this is the start of a really big pushback from money managers and a great clash between government and markets. The truth, though, is probably much more prosaic.
Ian Stilley, international chief investment officer for fixed income at JPMorgan Asset Management, is among those who are unconvinced that this situation is as unusual as it sounds. U.S. yields have moved higher since rate cuts began in September “a big step, no question,” he said. But he also noted that yields had fallen long before the Fed’s pivot.
That in itself is problematic – the usually steady government bond market has been prone to overreaction of late, which can lead to unpleasant snapbacks. But also, facts have changed, as the Fed acknowledged in December. The economy is still humming along nicely and Donald Trump’s economic policies reek of inflation. Investors are busily writing down the rate cut for 2025 and the market is moving accordingly.
For the UK, supposedly the main victim of Bond vigilante ire, it’s hard to argue that anything meaningful has changed. “Can we really blame Rachel Reeves?” ask Hedge fund group man this week. “The current episode does not appear to be UK-specific at all — gilt and Treasury yields are essentially running in tandem. . . Our lesson here is to be careful about what the media says.” (I’ll take the liberty of excluding myself from that burn.)
Added to the mix, the New Year’s rush of bonds coming into the market has been unusually large. Investors say that was somewhat exaggerated last week when borrowers were eager to avoid a one-day U.S. market shutdown to mark the death of former President Jimmy Carter. The butterfly effect in action.
All these left bond bashers are pushing at an open door, especially in the UK. M&G Investments’ Andrew Chorlton, chief investment officer for fixed income, said at an event that hedge funds “looking to make a quick buck” appeared to play a big role in seeing how far they could push gilts down. Central banks have also pulled back from supporting the bond market. The quantitative easing that accompanied ultra-low interest rates is over. With that safety net gone, what you see is a more “true” price for government bonds
At this point it’s easy for those interested in bashing Bonds or politicians. But bond market shocks are not born equal. I could be proven wrong, but this seems like an assessment, not a rebellion.
