The bond market is the most powerful force in the financial world. It can break governments, if it chooses. And now it’s training its firepower on Chancellor Rachel Reeves.
Governments are dependent on the bond market. It’s how they raise money to fund spending. If investors stop buying their bonds, all hell breaks loose.
Bond markets stop governments from playing fast and loose with a country’s finances, as Labour has been doing since the election. It’s an essential job.
So-called “bond vigilantes” discipline excessive government spending by demanding higher yields to buy their bonds. And that’s what they’re doing to us right now.
Bond investors are big global institutions that need somewhere safe to park the huge sums at their disposal.
When they buy UK government bonds, known as gilts, they want to be certain they’ll get their money back.
Under Reeves, they’re not certain. So they’re demanding more interest to offset the risk.
Bond investors believe Labour pulled a fast one during the election, by pledging stability and growth.
Instead they’ve wrecked both.
Our credibility is sunk and bond investors feel like fools. So they’re giving the country a richly deserved punishment beating. This is only the start.
It seems incredible now, but when Sir Keir Starmer was elected bond markets were happy. They thought Labour would bring stability after Tory turmoil.
Reeves launched a huge a charm offensive, assuring businesses that Labour wasn’t run by hard-left Corbynites who would blow up the economy.
Bond markets took Reeves at her word. Now they feel cheated. Lied to. And we will all feel their wrath.
Yields on 10-year gilts slid to around 3.75% after the July election. Yesterday they nudged 4.9% as the penny belatedly dropped.
Reeves doesn’t know what she’s doing.
Higher gilt yields will add an estimated £10billion to the UK’s borrowing costs, blowing a hole in Reeves’ fiscal plan and forcing her to cut spending or hike taxes to make her sums add up.
Unless Starmer and Reeves get a grip, gilt yields could rise past 5% in short order, and won’t stop there.
To put that into perspective, Greece only pays 3.32%. Despite its many problems, bond markets trust the Greeks a lot more than they trust us.
The problem is, I don’t think Starmer and Reeves will get a grip. They are arrogant and out of their depth.
Reeves plans to issue a staggering £300billion of gilts this year, at the highest rates of interest in decades. Most of the money will vanish into unreformed public services or the back pockets of the public sector unions.
It will do nothing to boost growth.
Reeves still thinks she can lie her way out of this. It’s worked so far. She keeps claiming against all the evidence that she has restored economic stability.
Bond markets won’t swallow it any longer. They’ve had enough of Labour’s nonsense. Unlike the rest of us, they can do something about it. And they are.